THE  SHIFTING  AND   INCIDENCE 
OF  TAXATION 


COLUMBIA  UNIVERSITY  PRESS 

Columbia  University 

New  York 


SALES  AGENTS 

HUMPHREY  MILFORD 

Amen  Corner,  E.C 

London 

EDWARD   EVANS   &   SONS,  Ltd. 

30  North  Szechuen  Road 

Shanghai 


THE  SHIFTING  AND  INCIDENCE 
OF   TAXATION 


BY 


EDWIN    R.   A.    SELIGMAN 

McViCKAR  Professor  of  Political  Economy 
Columbia  University 


FOURTH  EDITION 
REVISED 


COLUMBIA   UNIVERSITY   PRESS 
1921  • 

All  rights  reserved 


91411 


Copyright,  1899, 
By  the   MACMILLAN  COMPANY. 

Copyright,  1910  and  1921, 
By  the  COLUMBIA  UNIVERSITY   PRESS. 


Third  edition,  revised  and  enlarged,  January,  1910, 
Fourth  edition,  revised,  February,  1921. 

Italian  Translation,  1906. 
Japanese  Translation,  1910. 
French  Translation,  1917. 


NoriDooIi  Jpttet 

J.  S.  Cuahing  Co.  —  Berwick  4  Smith  Co. 

Norwood,  Mass.,  U.S.A. 


h 


PREFACE    TO    THE    THIRD    EDITION 

In  the  eleven  years  that  have  elapsed  since  the  last  edition 
of  this  work,  the  practical  problems  of  finance  in  various 
countries  have  evoked  a  renewed  interest  in  the  problem  of 
the  incidence  of  taxation.  Advantage  has  been  taken  of  the 
literature  that  has  accompanied  this  newer  interest  to  bring 
the  discussion,  as  far  as  possible,  down  to  date.  The  inclu- 
sion of  the  new  matter  has  necessitated  a  considerable  addi- 
tion to  the  bulk  of  the  work,  although  it  has  involved  no 
substantial  changes  in  the  doctrine  itself. 

In  Part  One,  devoted  to  the  history  of  the  theory,  atten- 
tion has  been  called  to  some  interesting  writers,  especially 
of  the  seventeenth  and  eighteenth  centuries,  who  were  over- 
looked in  the  previous  editions.  It  is  hoped  that  this  his- 
torical part  will  now  be  found  fairly  complete,  at  all  events 
so  far  as  EngHsh  literature  is  concerned. 

With  reference  to  the  substantive  part  of  the  doctrine  of 
incidence,  the  chief  alterations  and  additions  are  the  follow- 
ing :  The  introduction  to  the  whole  volume  has  been  con- 
siderably enlarged  and  completely  rewritten.  An  attempt 
has  been  made  to  clarify  the  discussion  of  the  tax  on  agri- 
cultural land  by  calling  attention  to  considerations  of  practi- 
cal moment.  The  chapter  on  city  real  estate  taxes  has  been 
virtually  rewritten,  in  view  of  the  growing  significance  of 
local  finance.  In  chapter  four  a  fuller  discussion  of  the 
mortgage  tax  is  inserted,  and  in  chapter  seven  special  atten- 


vi  Preface  to  the  Fourth  Edition 

tion  is  paid  to  the  newer  stock  and  produce-exchange  taxes. 
Moreover,  in  almost  every  chapter  there  will  be  found  addi- 
tions involving  references  to  the  more  recent  discussions, 
and  also  taking  up  some  newer  points  which  had  been 
omitted  in  the  preceding  edition. 

EDWIN   R.   A.    SELIGMAN. 
Columbia  University, 
November,  1909. 


PREFACE   TO   THE   FOURTH    EDITION 

Although  eleven  years  have  again  rolled  by,  the  contribu- 
tions that  have  been  made  to  the  subject  in  the  interval  have 
been  so  comparatively  slight  as  to  necessitate  only  moderate 
changes  in  this  new  edition.  The  stirring  events  of  the  last 
decade  have  furnished  material  rather  for  study  of  the  general 
effects  of  taxation  than  for  that  of  incidence.  Apart  from 
the  fuller  utilization  of  the  older  literature,  which  will  be  found 
scattered  through  this  edition  (esp.  pp.  29,  65,  6"]^  72,  jZ,  84, 
88,  94,  100,  104,  175,  180,  351,  and  354)  the  chief  alterations 
will  be  found  in  connection  with  the  topics  of  capitalization 
(pp.  183,  200,  218,  223,  and  286),  and  the  incidence  of  taxes 
on  profits  and  surplus  (pp.  362  and  393). 

E.  R.  A.  S. 
Columbia  University, 
February,  1921. 


TABLE    OF   CONTENTS 

INTRODUCTION 


PACK 


Terminology:    Impact,  Shifting,   Incidence;    Capitalization,   Trans- 
formation ;  Pressure,  Evasion,  Effect I 


PART   I 
THE  HISTORY  OF  THE  DOCTRINE  OF  INCIDENCE 

Book  I 

THE   EARLY   THEORIES 

CHAPTER   I 

Those  who  discuss  the  General  Excise 

The  Origins :  Hobbes,  Cradock,  Culpeper 19 

1 .  The  Theory  that  the  Excise  does  not  rest  on  the  Poor  Consumers. 

Mun,  Waterhouse,  Fauquier    .......       25 

2.  The  Theory  that  the  Excise  rests  on  Consumers  in  general. 

Petty,  Burnaby,  De  Foe,  Sheridan,  Nickolls,  Brooks,  .Manley, 
Houghton,  Temple,  De  Witt,  Tucker,  Young,  Temple,  Child, 
Cary,  Nugent,  Vanderlint,  Postlethwayt,  Forster  .         .       30 

3.  The  Theory  that  the  Excise  is  shifted  to  the  Landowners. 

Anonymous  writers,  Pulteney,  Amhurst  .....       62 

4.  The  Theory  that  the  Excise  rests  on  the  Traders. 

Anonymous  writers,  Roberts,  Ashley,  American  writers  .         .      66 

CHAPTER   II 

Those  who  favor  a  Single  Tax  on  Luxuries 

Chamberlayne,  Parker,  Downes,  Richardson,  Tucker,  Nickolls,  Forster       79 


viii  Table  of  Contents 

CHAPTER   III 

Those  who  favor  a  Single  Tax  on  Houses 

Decker,  Postlethwayt,  Fauquier,  Horsley  ;  Massie,  Young  .        .       89 


PAGE 


CHAPTER   IV 

Those  who  favor  a  General  Property  Tax 

Culpeper,  De  Foe,  Drake,  Wagstaffe 96 

CHAPTER   V 

Those  who  favor  a  Single  Tax  on  Land 

Locke,  Davenant,  Asgill,  Cantillon,  Wood,  Vanderlint       .        .         .     loi 

CHAPTER   VI 

Those  who  favor  a  More  Eclectic  System 

Walpole,  Reynell,  Nugent,  Hume,  Steuart,  Stewart,  Young        .        .110 

Book  II 

THE   MODERN  THEORIES 

CHAPTER    I 

The  Physiocratic  Theory 

Quesnay,  Mirabeau,  Mercier  de  la  Riviere,  Du  Pont  de  Nemours, 

Baudeau,  Le  Trosne,  Turgot ;  Franklin,  Hamilton      .         .        .125 

CHAPTER   II 

The  Absolute  Theory 

Adam  Smith,  Ricardo 143 


Table  of  Contc7its  ix 

CHAPTER   III 
The  Equal-diffusion  Theory 

PAGE 

The  Optimists. 

Verri,  Mansfield,  Dickson,  Young,  Hamilton  ;  Canard,  Courcelle- 
Seneuil,  Cherbuliez,  Prittwitz,  Thiers,  De  Broglie,  Stein ; 
Montgomery,  Gibbon.  Wells,  Sherman,  Cooley,  Hamilton, 
Avebury  .         .         .         .         .         .         .         .         .         .152 

The  Pessimists. 

Proudhon ;  Bolles       .         .         . 172 

CHAPTER   IV 

The  Capitalization  Theory 

Voung,  Craig,  Sartorius,  Hoffmann,  Murhard ;  Passy,  Wolowski, 
Destutt  de  Tracy,  Du  Puynode  ;  Baxter,  Noble ;  Rau,  Schaffle, 
Pierson 174 

CHAPTER  V 

The  Eclectic  Theory 

J.-B.  Say,  Sismondi,  Gamier,  Parieu,  Du  Puynode,  Vignes,  Leroy- 
Beaulieu ;  v.  Thiinen,  Rau,  v.  Hock,  Prince-Smith ;  Jones, 
Buchanan,  J.  Mill,  Senior,  McCulloch,  J.  S.  Mill,  Fawcett, 
Cliffe-Leslie  ;  Bastable,  Graziani.  De  Roosendaele,  Purdy,  Natoli, 
Tivaroui 184 

CHAPTER   VI 

The  Agnostic  Theory 

Held,  Hamilton,  Murray,  Avebury 201 

CHAPTER   VII 

The  Socialistic  Theory 

Lassalle,  Shearman  ..........     203 

CHAPTER    VIII 

The  Quantitative  ok  Mathematical  Theory 

Cournot,  Fauveau,  Jenkin,  Pantah^oni.  Walras,  Wicksell.  Conigliani, 

Barone ;   Marshall,  Edgeworlli 205 


X  Table  of  Contents 

PART    II 

THE  DOCTRINE  OF  INCIDENCE 

CHAPTER   I 

General  Principles 

PAGE 

General  considerations      .         .         .         .         .        .        .         .         .219 

Is  the  commodity  durable  or  perishable? 221 

Is  the  commodity  subject  to  the  Inn-   of  monopoly  or  to  that 

of  competition?       .........  226 

Is  the  tax  general  or  exclusive  ?  .         .         .         .         .         .         .  227 

Is  there  complete  mobility  of  capital  ? 227 

Is  the  demand  for  the  commodity  elastic?  .         ....  228 
To  what  extent  do  differential  advantages  of  production  affect  the 

supply? ^-S-h 

What  is  the  ratio  of  product  to  cost? 24.0 

Is  the  tax  imposed  on  margin  or  on  surplus  ?       .         .         .         .  249 

Is  the  tax  large  or  small? 250 

Is  the  tax  proportional  or  progressive ? 251 

Is  the  commodity  a  final  good?  .         ......  252 

Conclusions 253 

CHAPTER   II 
Taxes  on  Agricultural  Land 

General  considerations      .         .         .         .         .         .         •         .         -255 

Taxes  on  economic  rent     .         .         .         .         .         .         .         -257 

Uniform  taxes  according  to  the  quantity  or  the  quality  of  the 

land 259 

Taxes  on  gross  product      ........  261 

Taxes  on  agricultural  profits       .......  262 

Taxes  on  property  or  selling  value      ......  262 

Taxes  on  rental  value         . 271 

CHAPTER   III 
Taxes  on  Urban  Real  Estate 

General  considerations      .........  277 

Taxes  on  the  ground  owners       .         .         .         .         .         .         .  28 1 

Taxes  on  the  value  of  the  house          ......  287 


Table  of  Contents 


XI 


Taxes  on  the  owners  of  house  and  ground 
Taxes  on  house  rentals 

Hypothetical  cases 

Actual  cases        .... 

House  owner  and  landlord  . 

Demand  for  house  accommodation 

Friction       ..... 

Differential  rates 

"  Onerous  "  and  "  beneficial "  rates 
Conclusion 


294 
298 
304 
307 
310 
312 

315 

320 
324 


CHAPTER   IV 
Taxes  on  Personal  Property  and  Capital 

Uniform  taxes  on  capital  .........  326 

Unequal  taxes  on  capital   .........  328 

1.  Incidence  as  between  the  original  owner  and  the  new  pur- 

chaser   328 

2.  Incidence  as  between  the  lender  and  the  borrower         .         .  329 

Taxes  on  mortgages  ........  333 

3.  Incidence  as  between  the  producer  and  the  consumer    .         .  337 

CHAPTER    V 
Taxes  on  Profits 

Taxes  on  gross  product     .         .         .         .         .     •     .         .         .         .  339 

Taxes  on  competitive  enterprises 340 

Taxes  on  monopolies          ........  342 

Ultimate  effects 348 

Excess-of-tax -above-price  doctrine 350 

Taxes  on  gross  receipts     .         .         .         .         .         .         .         .         -355 

Under  competitive  conditions     .         .         .         .         .         .         -356 

Under  monopoly  conditions        .......  357 

Taxes  on  net  receipts 358 

Taxes  of  fixed  amount       .........  363 

Application 365 


CHAPTER   VI 
Taxes  on  Wages 


Taxes  on  professional  earnings 
Taxes  on  ordinary  wages  . 


367 
368 


xii  Table  of  Co7i  tents 


CHAPTER    VII 
Other  Taxes 

FAGB 

Poll  taxes 371 

Inheritance  taxes       ..........  371 

Excise  taxes      ...........  372 

Import  and  export  duties 373 

Stamp  taxes      ...........  379 

Taxes  on  stock  and  produce-exchange  transactions     .         .         .  383 

Income  taxes 385 

CHAPTER   VIII 
Conclusion 

Optimism  and  Pessimism 389 

General  tendencies    ..........  390 

Advice  to  legislators 394 

BIBLIOGRAPHY 

Works  prior  to  Adam  Smith 399 

Works  since  Adam  Smith  .         .         .         .         .         .         .         -417 

Index  of  Authors 425 


INTRODUCTION 

The  problem  of  the  incidence  of  taxation  is  one  of  the 
most  neglected,  as  it  is  one  of  the  most  complicated,  subjects 
in  economic  science.  It  has  indeed  been  treated  by  many 
writers  ;  but  its  discussion  in  scientific  literature,  as  well  as 
in  everyday  life,  has  frequently  been  marked  by  what  Parieu 
calls  the  "  simplicity  of  ignorance."  Yet  no  topic  in  public 
finance  is  more  important ;  for,  in  every  system  of  taxation, 
the  cardinal  point  is  its  influence  on  the  community.  With- 
out a  correct  analysis  of  the  incidence  of  a  tax,  no  proper 
opinion  can  be  formed  as  to  its  actual  effect  or  its  justice.  It 
is,  therefore,  time  for  an  attempt  to  be  made  not  only  to  pass 
in  review  the  theories  hitherto  advanced,  but  to  contribute 
to  the  solution  of  some  of  the  theoretic  problems  while  pay- 
ing special  attention  to  the  practical  aspects  of  the  discussion. 
^»  A  word  first  as  to  the  terminology.  In  the  process  of  tax- 
ing,  we  must  distinguish  three  conceptions.  First,  a  tax  may 
be  imposed  on  some  person ;  secondly,  it  may  be  transferred 
by  him  to  a  second  person  ;  thirdly,  it  may  be  ultimately 
borne  by  this  second  person  or  transferred  to  others  by  whom 
it  is  finally  assumed.  Thus  the  person  who  originally  pays 
the  tax  may  not  be  the  one  who  bears  its  burden  in  last 
instance.  The_process  of  the  transfer  of  a  tax  is  known  as 
the  sJiifting  of  the  tax,  while  the  settlement  of  the  burden  on 
the  ultimate  taxpayer  is  called  the  incidence  of  the  tax.  The 
incidence  of  the  tax  is  therefore  the  result  of  the  shifting, 
and  the  real  economic  problem  lies  in  the  nature  of  the 
shiftings. 

The  English  fiscal  language  is  somewhat  deficient  in  its 
nomenclature.  While  incidence  conveys  to  the  mind  the 
notion  of  the  ultimate  result  of  the  shifting,  we  have  no 
word  in  common  use  to  express  the  immediate  result  of  the 


i 


Shifting  and  Incidence  of  Taxation 

original  imposition  of  the  tax.  "  Assessment "  of  the  tax 
looks  upon  the  process  from  above  downward ;  but  what  we 
need  is  a  term  to  characterize  the  process  as  seen  from  below 
upward.  The  French  and  the  Italians  have  the  words  per- 
cussion, pcrcjissione,  to  express  this  idea  of  the  primary  result 
of  the  assessment.  They,  therefore,  logically  term  the  shift- 
ing of  the  tax  the  repercussion  ^  of  taxation,  the  ultimate  result 
of  which  is  the  \nc\dtnce.{inci device,  ijicidcnsa). 

The  English  term  which  best  expresses  this  idea  is  "impact." 
We  occasionally  speak  of  a  tax  "impinging"  on  somebody  or 
something,  so  that  the  "  impact  "  of  a  tax  would  denote  the 
act  of  impinging.  Moreover,  we  ordinarily  refer  to  the  im- 
pact of  a  projectile  in  this  very  sense.  The  impact  of  a  tax 
is  therefore  the  immediate  result  of  the  imposition  of  a  tax 
on  the  person  who  pays  it  in  first  instance.  It  corresponds 
to  what  is  often,  but  erroneously,  called  the  "  original  inci- 
dence "  or  the  "  primary  incidence  "  of  a  tax.  There  is  but 
one  kind  of  incidence,  namely  the  ultimate  incidence,  which 
emerges  only  when  the  tax  finally  settles,  or  comes  to  rest, 
on  the  person  who  bears  it.  We  thus  have  the  three  distinct 
conceptions  —  the  impact,  the  shifting,  and  the  incidence  of 
a  tax,  which  correspond  respectively  to  the  imposition,  the 
transfer,  and  the  settling,  or  coming  to  rest,  of  the  tax.  The 
impact  is  the  initial  phenomenon,  the  shifting  is  the  inter- 
mediate process,  the  incidence  is  the  result.  To  confuse  the 
impact  with  the  incidence  is  as  reprehensible  as  to  confound 
the  incidence  with  the  shifting. 

Strictly  speaking,  the  impact  of  a  tax  includes  not  only 
the  immediate  result  of  the  original  imposition,  but  also  the 
subsequent  impinging  of  a  tax  on  a  person  who  is  not  the 
tax-bearer.  Thus  if  a  tax  is  imposed  on  A,  shifted  to  B,  and 
then  again  shifted  to  C,  who  finally  bears  the  tax,  we  can 
properly  speak  of  the  impact  of  the  tax  first  on  A  and  then  on 
B.     The  impact  is  transferred  or  repeated.     It  is  only  when 

^  They  also  use  the  words  translation,  traslazione,  which  are  the  same  as  our 
"transference"  or  "shifting."  The  French  also  speak  of  taxes  being  "  rejetes," 
our  "  thrown  off "  or  "  shifted." 


Introduction  3 

the  taxpayer  is  at  the  same  time  the  tax-bearer  that  the  im- 
pact is  immediately  followed  by,  or  converted  into,  the  inci- 
dence. For  a  similar  reason,  when  the  initial  taxpayer  is 
also  the  tax-bearer,  the  impact  of  the  tax  is  at  once  followed 
by  the  incidence,  without  any  intermediate  process  of  shifting. 
But  in  all  cases  incidence  signifies  the  result,  while  shifting, 
if  there  is  any,  denotes  the  process. 

The  point  to  be  emphasized  is  that  through  the  process  of 
shifting,  the  taxpayer  escapes  the  burden  of  the  tax.  There 
are,  however,  other  methods  of  escape,  which  must  not  be 
confused  with  shifting.  It  is  here  that  both  the  analysis  and 
the  nomenclature  of  the  subject  have  been  exceedingly  de- 
fective.^ Let  us  endeavor  to  clear  up  the  matter  and  to 
suggest  what  may  possibly  be  deemed  worthy  of  acceptance 
as  the  definitive  nomenclature. 

Whenever  there  is  a  shifting  of  taxation,  the  tax  may  be 
shifted  forward  or  backward.  Thus'a  producer,  upon  whom 
a  tax  has  been  assessed,  may  shift  it  to  the  consumer,  or  a 
seller  may  shift  it  to  the  purchaser.  The  tax  is  shifted  for- 
ward to  the  consumer  or  the  purchaser  respectively.  On  the 
other  hand,  the  tax  may  be  imposed  in  first  instance  on  the 
consumer  or  the  purchaser,  and  may  be  shifted  by  him  to 
the  producer  or  the  vendor  respectively.  In  this  case  the 
tax  is  shifted  backward.  "  Finally,  when  the  tax  is  shifted 
from  the  seller  to  an  intermediate  purchaser,  who  then  sells 
to  another  person,  and  so  on  until  the  tax  finally  settles  on 
the  ultimate  purchaser  or  consumer,  we  speak  of  the  tax 
being  shifted  onward.  Taxes,  therefore,  may  be  shifted  for- 
ward, backward,  or  onward.'^ 

1  The  English  and  the  French  writers  have  done  virtually  nothing  to  clear 
up  the  confusion.  The  Germans  have  done  a  little,  but  only  a  little.  More  has 
been  accomplished  by  the  Italians,  especially  by  Maffeo  Pantaleoni,  Teoria  della 
Traslazione  dei  Tributi,  1882,  and  more  recently  by  Fabrizio  Natoli,  Stiuh  stt  gli 
Effetti  Economici  delP  Imposta,  1909.  But  their  analysis  also  is,  as  we  shall  see, 
not  entirely  free  from  objection. 

•^  The  Germans,  since  the  time  of  von  Hock,  in  1863,  have  been  accustomed  to 
these  conceptions,  which  they  designate  by  the  terms  Fortiv'dhung,  Ruck-wdhung, 
and   WeiUrwdlzung,  — all  of  them  subdivisions  of  shifting  or  Ueberwdhung. 


4  Shiftmg  and  Incidence  of  Taxation 

To  be  contrasted,  in  part  at  all  events,  with  the  shifting  of 
taxation  is  the  capitalization  or  the  amortization  of  taxation. 
The  chief  feature  of  this  phenomenon,  which  will  be  fully 
discussed  later,^  is  the  fact  that  under  certain  circumstances 
the  purchaser  of  a  taxable  object,  by  cutting  down  the  pur- 
chase price,  discounts  all  the  taxes  which  he  may  be  called 
upon  to  pay  in  the  future.  If,  for  instance,  the  ordinary  re- 
turn on  investments  in  securities  is  fiye_per  cent  and  a  tax 
of  one  per  cent  is  imposed  on  a  particular  kind  of  corporate 
bonds  selling  at  par,  the  price  of  these  bonds  will  fall  from 
par  to  eighty.  The  tax  will  be  amortized  or  discounted 
through  a  depreciation  of  the  capital  value  of  the  bonds  by  a 
sum  equal  to  the  capitalized  value  of  the  tax.  The  new  pur- 
chaser thus  escapes  the  tax  which  he  is  compelled  to  pay  to 
the  government  by  giving  so  much  less  for  the  bonds. 

The  few  writers  who  have  discussed  this  phenomenon  gen- 
erally consider  capitalization  to  be  a  kind  of  shifting.  In  a 
certain  sense,  indeed,  there  is  a  seeming  justification  for  this 
view.  For  the  purchaser  escapes  the  tax  by  throwing  it  off, 
or  shifting  it  backward,  on  the  seller.  In  reality,  however,  a 
distinction  ought  to  be  observed  between  shifting  and  capital- 
ization. Shifting  implies  a  process  applicable  to  a  single  tax 
or  to  a  tax  each  time  that  it  is  imposed  ;  capitalization  implies 
a  process  applicable  to  a  whole  series  of  taxes  and  takes  place 
before  any  of  them,  with  the  exception  of  the  first,  is  paid. 
In  the  case  of  a  dealer  who  shifts  a  tax  on  a  commodity 
back  to  the  producer,  the  process  takes  place  each  time  that 
the  tax  is  levied,  and  the  producer  reduces  the  selling  price 
each  time  by  the  amount  of  the  tax.  In  the  case  of  capitali- 
zation the  purchaser  indeed  pays  the-tax,  but  the  initial  pos- 
sessor or  vendor  reduces  the  price  by  a  sum  equal  to  all  the 
future  taxes  which  the  purchaser  expects  to  be  called  upon  to 
pay.  In  the  one  case  we  have  the  shifting  back  of  a  single 
tax ;  in  the  other  case  we  have  the  throwing  back  of  a  whole 
series  of  taxes  at  once.  For  capitalization  implies  a  change 
in  price  equal  to  the  capital  value  of  all  anticipated  payments. 

iPart  II,  chap,  i,  §  i. 


Introduction  5 

There  is,  therefore,  a  marked  distinction  between  shifting  and 
capitalization.  If  a  tax  is  shifted,  it  cannot  be  capitalized  ;  if 
a  tax  is  capitalized,  it  cannot  be  shifted.  A  tax  on  houses,  for 
instance,  as  we  shall  see  later,  if  imposed  on  the  tenant,  may  pos- 
sibly be  shifted  back  to  the  owner,  but  cannot  be  capitalized;  a 
tax  on  land,  imposed  on  the  tenant,  may  be  capitalized  without 
being  shifted  to  the  present  owner.  Shifting  and  capitaliza- 
tion are  in  reality  opposite,  not  complementary,  conceptions. 
In  the  case  of  both  shifting  and  capitalization,  however,  the 
taxpayer  escapes  the  burden  of  the  tax  through  the  mediation 
\of  the  process  of  exchange.  Without  the  purchase  and  the 
sale  of  the  commodity  there  can  be  neither  shifting  nor  cap- 
italization. There  is,  however,  a  third  method  of  escape  pos- 
sible, which  is  based  not  upon  exchange,  but  upon  production. 
Let  us  take,  for  instance,  the  case  of  a  tax  imposed  either 
upon  a  finished  commodity  or  upon  the  process  of  producing 
the  commodity.  It  is  possible,  under  certain  circumstances, 
that  the  producer,  fearing  the  loss  of  his  market  if  he  should 
add  the  tax  to  the  price,  will  pay  the  tax  and  endeavor  to 
recoup  himself  by  so  improving  the  process  of  production  as 
to  succeed  in  turning  out  his  units  of  product  at  a  lower  cost. 
In  such  a  case  the  loss  occasioned  by  the  tax  may  be  offset, 
or  perhaps  even  more  than  offset,  by  the  gains  resulting  from 
the  economies  of  production. 

What  shall  we  call  such  a  phenomenon  .''  The  Germans 
term  it  the  "  thro  wing-off "  {Abzvdlzmig),  while  the  Italians 
call  it  the  "rejection  "  or  the  " removal  "  of  the  tax.^  All  these 
terms,  however,  are  ill-chosen,  because  there  is  nothing  dis. 
tinctive  in  them.  If  a  tax  is  shifted,  it  is  also  thrown  off  or 
removed  from  the  taxpayer.  We  venture,  therefore,  to  sug- 
gest for  this  phenomenon  the  term  "  transformation  of  taxa- 
tion."    For  by  virtue  of  its  operation  the  loss  due  to  the  tax  is, 

1  The  term  Abwahung\%  found  first  in  von  Hock,  Die  offentlichen  Abgahen  und 
Schulden,  1863,  although  the  phenomenon  itself  had  previously  been  described 
by  Rau.  Pantaleoni,  op.  cit.,  p.  28,  calls  it  rigetto  deW  itnposla  ;  Natoli,  op.  cit., 
p.  22,  calls  it  remozione  delP  imposta  :  Tenerelli,  /,'  Azione  delle  Impaste  Indirette 
iui  consumi,  1898,  p.  67,  calls  it  rimozione  deW  imposta. 


6  Shifting  and  Incidence  of  Taxation 

or  may  be,  transformed  into  a  gain  :  the  tax  is  transformed 
into  its  opposite.  The  attribute  of  removal  or  throwing-off 
("rejection")  of  the  tax  is  common  to  all  three  methods  of 
escape  —  shifting,  capitalization,  and  transformation  ;  but  the 
attribute  of  the  conversion  of  loss  into  gain  is  found  only  in 
the  case  of  transformation. 

Whether  there  is  any  such  phenomenon  as  the  transforma- 
tion of  taxation  has  sometimes  been  questioned.  The  discus- 
sion is  at  least  as  old  as  the  time  of  Hume,  and  has  usually 
been  associated  with  the  query  as  to  whether  taxes  can  act  as 
a  spur  to  industry.  As  a  broad  generalization,  the  assertion 
is  indeed  open  to  grave  doubt,  for  taxes  on  industry  must 
indubitably  be  regarded  on  the  whole  as  a  drag  or  burden  on 
industry,  rather  than  as  a  spur  to  industry.  But  while  it  is 
doubtless  true  that  under  a  regime  of  free  competition  the 
quest  for  profits  will  impel  the  individual  to  make  the  best 
use  of  his  opportunities,  it  is  none  the  less  a  fact  that  there 
have  frequently  been  cases  where  the  attention  of  the  producer 
was  first  directed  to  the  possibility  of  improving  the  produc- 
tive process  by  some  new  burden  which  started  a  whole 
branch  of  industry  out  of  its  comparative  lethargy  and  caused 
it  to  forsake  the  old  rut.  Take,  for  instance,  the  familiar  ex- 
ample of  the  eighteenth-century  Scotch  tax  on  the  whiskey 
distillery  which  led  to  such  improvements  in  the  process  that 
for  a  time  at  least  the  distillers  succeeded  in  transforming  the 
loss  into  a  gain ;  or  the  case  of  the  European  continental  tax 
on  beet  sugar  in  the  nineteenth  century,  the  burden  of  which 
admittedly  first  directed  the  attention  of  the  producers  to  the 
possibility  of  reducing  the  cost  of  extracting  the  sugar  from 
the  beets.  It  may  be  true  that  the  improvements  would  prob- 
ably have  come  about  of  themselves  after  a  time ;  but  this 
does  not  invalidate  the  accuracy  of  the  contention  that  a  tax 
may  be  the  occasion,  even  if  it  be  not  the  cause,  of  a  better- 
ment in  production.  Whenever  we  find  such  a  phenomenon, 
we  are  in  the  presence  of  the  transformation  of  a  tax  —  the 
transformation  from  loss  into  possible  gain. 

The   literature  of  finance,  however,  has  thus  far  failed  to 


Introduction  7 

put  the  transformation  of  taxation  into  its  proper  place. 
Some  writers  confuse  transformation  with  shifting,^  whereas, 
as  we  are  now  aware,  the  two  conceptions  are  entirely  distinct. 
In  the  case  of  shifting,  the  tax  is  thrown  off  the  taxpayer 
and  settles  upon  the  final  tax-bearer.  The  incidence  is  on 
some  one  else  than  the  original  taxpayer.  In  the  case  of 
transformation,  on  the  contrary,  the  incidence  is  on  the 
original  taxpayer.  He  escapes,  not  by  a  shifting  of  the  tax, 
but  by  a  transformation  of  the  tax.  Transformation  depends 
upon  incidence  and  is  a  reaction  from  the  incidence.  If  there 
vis  no  incidence,  there  can  be  no  transformation.  But  if  there 
is  a  shifting,  there  can  obviously  be  no  incidence  on  the  original 
taxpayer.  Transformation  and  shifting  are  hence  opposites. 
Others,  again,  confuse  transformation  with  evasion  of  tax- 
ation. 2  This  phenomenon,  however,  as  will  be  seen  imme- 
diately below,  is  something  entirely  different.  Others  finally 
seek  unduly  to  extend  the  sphere  of  transformation,  and  in 
elude  under  this  phenomenon  not  only  economies  through 
improvements  in  production,  but  also  savings  through  changes 
in  consumption,^  which,  as  we  shall  see,  properly  come  under 
a  quite  distinct  head. 

^  This  is  true  especially  of  the  Germans.  Although  von  Hock  was,  as  stated 
above,  the  first  to  speak  of  Abwdhung,  subsequent  writers  used  this  as  a  general 
term  synonymous  with  Ueherivalzung.  So,  e^.,  Rau,  and  Prince-Smith  in  his 
essay  "  Ueber  die  Abwalzung  "  in  the  Vierteljahrschrift fiir  Volks-virihsckaft  und 
Kulturgeschichte,  vol.  xiii  (i866).  Held,  in  his  article  "  Zur  Lehre  von  der  Ueber- 
walzung  der  Steuern  "  in  the  Zeitschrift  fur  die  gesamte  Staats^vissenschaft,  1868, 
pp.  489  and  492,  first  called  attention  to  the  fact  that  transformation  is  really  not 
shifting,  but  he  did  not  designate  transformation  by  the  term  AhwlihiDig,  which, 
on  the  contrary,  he  continually  employed  as  synonymous  with  Ucherw'dhung. 
See,  e.g.,  op.  cit.,  p.  481,  and  Part  I,  book  ii,  chap.  6,  of  this  monograph.  Wagner 
clearly  describes  the  phenomenon  of  transformation,  which  he  calls  Abw'dhiing, 
but  he  considers  it  one  of  the  two  forms  of  Ueberwdhung  or  shifting,  the  other 
being  what  he  terms  Weiterwdlzung.  See  his  Finanvwissenschafi,  \\"  Theil 
(1880),  §  331.  p.  154.  The  same  is  true  of  the  later  editions.  The  more  recent 
German  writers  employ  the  terms  in  all  degrees  of  confusion,  none  of  them  mak- 
ing the  correct  distinction. 

■^  This  is  true,  e.g.,  of  Wicksell,  Finanztheoretische  Untersuchungen,  1 896,  p.  12. 
It  must  also  be  confessed  that  in  the  earlier  editions  of  this  book  the  distinction  was 
not  adequately  observed. 

^  This  error,  e.g.,  is  committed  by  Pantalconi,  op. cit.,  p.  25. 


8  Shifting  and  Incidence  of  Taxation 

The  transformation  of  taxation  is  therefore  a  method  of 
escape  from  taxation  which  must  be  classed  with  shifting  and 
capitaHzation.  Shifting  is  the  most  common,  capitaHzation 
somewhat  less  usual,  transformation  rather  infrequent.  While 
shifting  and  capitalization  are,  as  we  have  learned,  separate 
and  even  opposite  phenomena,  both  shifting  and  capitalization 
possess  two  attributes  which  differentiate  them  from  transfor- 
mation. These  are  the  means  of  escape  and  the  result.  In 
shifting  and  capitalization  the  escape  from  taxation  takes  place 
through  the  medium  of  exchange  of  commodities ;  in  trans- 
formation through  the  medium  of  production.  In  shifting  and 
capitalization  the  taxpayer  may  escape  the  burden,  but  can 
never  receive  a  benefit ;  in  transformation  the  taxpayer  may 
not  only  escape,  but  may  have  his  loss  transformed  into  a  gain. 

While  shifting,  capitaHzation,  and  transformation  of  taxa- 
tion are  three  forms  of  escape  from  taxation,  they  are  not  the 
only  forms.  There  remains,  in  fact,  one  more  method  of  es- 
cape from  taxation  which  is  even  more  common  than  any  of 
those  hitherto  mentioned  —  namely,  the  evasion  of  taxation. 
In  each  of  the  three  methods  of  escape  thus  far  discussed  the 
government  has  always  received  a  revenue,  whatever  may 
have  been  the  facts  as  to  the  taxpayer.  Whether  the  tax  be 
shifted,  capitaHzed,  or  transformed,  it  has  always  been  paid 
by  some  one.  Even  in  the  case  of  transformation  the  tax  is 
paid  by  the  producer,  and  it  is  of  no  fiscal  concern  to  the  gov- 
ernment whether  the  loss  of  the  producer  due  to  the  payment 
of  the  tax  is  transformed  into  a  gain. 

In  the  case  of  evasion,  however,  not  only  does  the  taxpayer 
escape  the  tax,  but  the  government  loses  its  revenue.  Eva- 
sion of  the  tax  takes  place  only  when  there  are  no  proceeds./ 
If  the  tax  is  evaded  in  part,  there  are  no  proceeds  as  to  the 
part  which  is  evaded.  Evasion  of  taxation  is  tantamount,  fis- 
cally speaking,  to  the  absence  of  taxation.  So  far  as  the 
revenue  of  the  government  is  concerned,  there  might  as  well 
be  no  tax.  In  all  other  forms  of  escape  from  taxation  the 
government  still  receives  its  due. 


Introductio7i  9 

Evasion  of  taxation  assumes  several  forms  —  the  most  im- 
portant categories  being  legitimate  and  illegitimate  evasion. 
The  conception  of  illegitimate  evasion  is  simple.  It  consists 
of  failure  of  the  legal  taxpayer  to  conform  to  the  provisions 
of  the  law.  He  may  be  a  smuggler,  or  a  "  tax-dodger,"  or  may 
indulge  in  any  one  of  a  variety  of  other  shifts.  In  every  case, 
however,  his  gain  is  the  government's  loss.  On  the  other 
hand,  the  evasion  may  be  legitimate,  that  is,  in  accordance 
with  law.  Legitimate  evasion  can  take  place  only  when  the 
individual  escapes  the  tax  by  refraining  from  the  consumption 
of  the  commodity.  Without  a  diminution  of  consumption 
there  can  be  no  legitimate  evasion.  Legitimate  evasion, 
moreover,  differs  according  as  it  is  intended  or  not  intended. 
Intentional  evasion  takes  place  when  the  legislator  expressly 

-desires  that  the  tax  be  not  paid.  The  object  of  the  tax  in 
such  a  case  is  not  fiscal,  but  social.     Thus  in  the  case  of  the 

N  American  tax  on  opium  or  on  state  bank-notes  the  purpose 
of  the  law  is  to  cause  the  individual  to  refrain  from  using 
opium  or  emitting  bank-notes.  The  same  would  be  true  of  a 
high  tariff.  To  the  extent  that  the  tariff  checks,  or  even 
prohibits,  imports,  the  tax  is  not  paid  and  the  purpose  of  the 
law  is  thus  achieved.  ""KOn  the  other  hand,  the  legislator  may 
desire  to  have  the  tax  paid,  but  the  imposition  or  the  increase 
of  the  tax  may  engender  an  unexpected  and  entirely  unwel- 
come falling  off  of  consumption,  thus  leading  to  a  decrease, 
or  even  to  the  entire  disappearance,  of  any  revenue  to  the 
treasury.  Such  cases  have  been  frequent  in  the  excise  legis- 
lation of  all  countries.  Sometimes,  however,  we  have  a  com- 
bination of  legitimate  and  illegitimate  evasion,  although,  of 
course,  the  legitimate  evasion  which  is  thus  combined  must  be 
of  the  unintentional  type.  For  manifestly  if  the  government 
desires  that  the  tax  be  not  paid,  non-payment  is  not  in  con- 
flict with  the  law.  A  good  illustration  of  such  a  combination 
of  illegitimate  and  legitimate  unintentional  evasion  is  afforded 
by  the  experience  of  the  American  government  with  the 
whiskey  tax  during  the  Civil  War  period,  the  sudden  jump  of 
the  tax  from  fifty  cents  to  two  dollars  a  gallon  causing  not 


lo  Shifting  and  Incidence  of  Taxation 

only  a  great  falling  off  in  consumption,  but  also  a  marked  in- 
crease in  frauds  on  the  revenue. 

If  we  sum  up  the  preceding  discussion,  we  can  portray  the 
various  categories  of  escape  from  taxation  in  the  following 
table :  — 


Escape 

I 


Revenue  to  No  revenue  to 

government  government 


Through  process  Through  process  Evasion 

of  of 

exchange  production 


I 1  I  I  1. 

Shifting         Capitalization     Transformation  Legitimate     Illegitimate 


Forward     Backward     ('Viv  •-*•>-  Intentional     Unintentional 

Of  all  these  forms  of  escape  from  taxation,  shifting  is 
the  r^aHy  important  fine.  Evasion  of  taxation  is  so  simple 
that  it  needs  little  elucidation ;  transformation  of  taxation  is  so 
infrequent  as  to  call  for  only  slight  consideration ;  capitaliza- 
tion of  taxation  is  so  closely  allied  to  shifting  that  it  can  best 
be  treated  in  connection  with  it.  In  the  process  that  intervenes 
between  the  impact  and  the  incidence  of  taxation,  shifting  is 
thus  really  the  phenomenon  that  calls  for  an  extended  study. 

In  addition  to  the  confusion  that  has  been  brought  about 
by  the  failure  to  distinguish  between  shifting  and  the  other 
forms  of  escape  from  taxation,  we  find  another  fertile  source  of 
error  in  the  failure  to  distinguish  between  the  shifting  of  a 
tax  and  the  incidental  burden  which  may  rest  on  the  shifter. 

When  we  consider,  for  instance,  the  shifting  of  a  tax  as 
between  buyer  and  seller,  or  between  producer  and  con- 
sumer, the  question  that  concerns  us  is :  Will  the  price  of 
the  article  be  raised  by  the  imposition  of  the  tax }     If  the 


Introduction 


II 


price  is  raised,  we  say  that  the  tax  is  to  that  extent  shifted. 
yBut  even  a  complete  shifting  of  the  tax  does  not  necessarily 
mean  an  entire  absence  of  loss  to  the  seller.  Thus,  it  usually 
happens  that  an  increase  of  the  price  of  a  commodity  leads 
to  a  decrease  in  sales ;  and  it  may  happen  that  these  de- 
creased sales,  even  at  higher  prices,  will  yield  less  total 
profits  than  before.  In  such  a  case,  not  only  does  the  buyer 
pay  the  tax,  but  the  seller  also  suffers  a  loss,  even  though  the 
tax  has  been  shifted  completely. 

These  incidental  burdens  may  be  summed  up  under  the 
head  of  pressure  of  taxation.  We  should  thus  have  a  fourth 
category  to  add  to  the  original  three  mentioned  above  on 
page  2.  In  tracing  the  life  history  of  a  tax,  in  other  words, 
it  might  seem  that  we  should  have  to  distinguish  between 
(i)  the  impact,  (2)  the  shifting  (and  other  forms  of  escape), 
(3)  the  incidence,  and  (4)  the  pressure  of  taxation.  In  real- 
ity, however,  the  pressure  of  taxation  is  not  simply  a  conse- 
quence of  the  incidence,  but  may  be  connected  with  any  of 
the  preceding  stages.^  There  may  be  a  pressure  or  inci- 
dental burden  resulting  from  the  impact  and  from  the  shift- 
ing or  other  forms  of  escape,  as  well  as  from  the  incidence. 
And  the  pressure  may  be  felt  not  only  by  those  who  pay,  but 
by  those  who  do  not  pay. 

That  there  is  a  distinction  between  the  incidence  of  a  tax 
and  the  pressure  of  the  incidence  is  obvious.  The  incidence 
of  a  tax  marks  the  final  payment  by  the  tax-bearer.  Ordina- 
rily, the  burden  upon  the  tax-bearer  is  equal  to,  or  measured 
by,  the  amount  of  the  tax  which  he  is  called  upon  to  pay. 
But,  as  we  shall  see  later,  there  are  cases  where  the  producer 
may  be  able,  as  the  consequence  of  a  tax,  to  raise  the  price 
of  the  commodity  not  only  by  the  amount  of  the  tax,  but  by 
something  more  than  this  amount  In  such  a  case,  not  only 
is  the  incidence  of  the  tax  upon  the  consumer,  but  the  burden 
resting  on  the  consumer  is  greater  than  the  amount  of  the 
tax.     The  loss  to  the  tax-bearer  outweighs  the  gain  to  the 

^  As  has  been  pointed  out  by  Natoli,  op.  cit.,  in  his  criticism  of  Pantaleoni. 


12  SJiifting  and  Incidence  of  Taxation 

treasury.  The  pressure  of  incidence  includes  this  extra 
loss.^ 

The  pressure  of  the  impact  of  a  tax  may  be  typified  by  the 
illustration  mentioned  in  the  last  paragraph  but  two.  The 
producer  may  shift  the  tax  entirely,  and  yet  his  restricted 
sales  may  lead  to  lower  profits.  This  decrease  of  profit 
represents  the  pressure  of  the  impact,  which  is  not  neutralized 
by  the  shifting  of  the  tax.  Conversely,  if  the  tax  is  originally 
imposed  upon  and  borne  by  the  consumer,  the  loss  possibly 
resulting  to  the  producer  through  the  decrease  of  sales 
represents  the  reaction  on  the  producer  of  the  pressure 
of  the  impact  on  the  consumer.  Again,  if  the  producer 
who  has  paid  the  tax  were  able  for  some  reason  to  shift 
to  the  consumer  only  the  exact  amount  of  the  tax,  not  in- 
cluding the  interest  on  the  amount  paid  out,  this  interest 
lost  by  the  producer  would  represent  the  pressure  of  the 
impact.^ 

The  pressure  connected  with  the  process  of  escape  from 
taxation  can  be  well  illustrated  in  the  case  of  evasion.  If  a 
tax  imposed  on  a  commodity  enhances  its  price  by  the 
amount  of  the  tax,  it  is  possible,  and  in  ordinary  cases  even 
likely,  that,  whether  the  tax  impinges  on  the  consumer 
directly  or  through  shifting,  the  consumer  will  restrict  his 
consumption.  He  may  even  be  led  to  abandon  the  consump- 
tion entirely.  If  this  occurs,  he,  of  course,  pays  no  tax, 
but  evades  it.  Yet  in  so  far  as  he  is  compelled  to 
resort  to  an  inferior  substitute,  or  to  suffer  the  complete 
deprivation  of  the  satisfaction  of  his  want,  he  undoubtedly 
undergoes  a  loss.  -This  is  not  a  pressure  of  incidence, 
because,  since  he  pays  no  tax,  there  is  no  incidence ;  it  is 

^  Professor  Adams,  Science  of  Finance,  p.  388,  seems  to  overlook  this  when  he 
says  :  "  Manifestly  there  can  be  no  payment  by  a  citizen  unless  there  is  a  corre- 
sponding receipt  by  the  government."  Professor  Bastable,  while  avoiding  this  mis- 
take, errs  in  including  this  extra  loss  under  the  head  of  incidence,  rather  than  of 
pressure  of  incidence.     Public  Finance,  3d  ed.,  1903,  p.  361. 

2  Pantaleoni,  op.  cit.,  p.  21,  is  in  error  in  characterizing  this  payment  of  interest 
as  a  partial  incidence  upon  the  producer.  As  Natoli  well  points  out,  op.  cit.,  p.  37 
there  can  be  no  incidence  without  a  corresponding  revenue  to  the  treasury. 


Introduction  1 3 

a  pressure  of  evasion.  The  burden  of  a  tax  may  thus  be 
\  felt  by  those  who  do  not  pay,  as  well  as  by  those  who 
do.  In  fact,  as  has  been  well  said,  "  persons  who  pay  a 
tax  are  often  less  injured  by  its  imposition  than  those  who 
pay  no  portion  of  it.  The  man  who  goes  two  miles  out  of 
his  way  daily  to  avoid  a  bridge  toll  would  be  more  bene- 
fited by  the  freeing  of  the  bridge  than  most  of  us  who 
pay  the  toll."  ^ 

This  consideration  has  led  the  writer  just  quoted  to  suggest 
the  entire  dropping  of  the  term  "  incidence  of  taxation  "  and 
the  substitution  in  its  stead  of  "  effects  of  taxation."  ^  The 
suggestion,  however,  has  very  properly  met  with  no  favor 
whatsoever.^     By  effects  of  taxation  we  may  mean  two  things. 

^  Edwin  Cannan  in  Memoranda  chiefly  relating  to  the  Classification  and  Inci- 
dence of  Imperial  and  Local  Taxation,  of  the  Koyal  Commission  on  Taxation, 
1899,  p.  166. 

'■^  "  I  have  no  doubt  that  it  is  desirable  to  eschew  the  use  of  the  term  'incidence 
of  taxation.'  It  unduly  restricts  inquiries  into  the  justice  and  expediency  of 
taxes,  since  it  is  always  held  that  the  '  real  incidence '  of  a  tax  is  upon  the  per- 
sons who  ultimately  pay  or  provide  the  money  for  a  tax.  ...  It  is  therefore 
far  better  to  consider  the  effects  of  taxation."     Cannan,  op.  cit.,  ibid. 

*  The  only  writer  who  seems  to  lean  toward  the  suggestion  is  Edgeworth,  who 
begins  his  series  of  articles  on  "  The  Incidence  of  Urban  Rates  "  in  the  Economic 
Journal,  \o\.  x  (1900),  p.  172  with  the  words  :  "  Incidence  here  denotes  all  those 
effects  of  taxation  with  which  the  economist  is  concerned."  Yet  on  p.  132  of  the 
Memoranda  mentioned  in  the  preceding  note  Professor  Edgeworth  quotes  with 
seeming  approbation  the  doubt  that  has  been  raised  as  to  whether  "  an  effect  of 
this  sort  —  detrimental  to  a  certain  class,  without  any  corresponding  benefit  to  the 
exchequer — can  properly  be  described  as  the  incidence  of  a  tax."  Yet  surely  it 
is  an  effect  "  with  which  the  economist  is  concerned."  On  the  other  hand  Bastable 
thinks  that  "  the  expression  is  far  too  well  established,  and  also  far  too  convenient  to 
be  thus  summarily  abandoned."  Public  Finance,  3d  ed.,  1903,  p.  361.  Natoli  says 
that  the  "  remedy,  as  everyone  can  see,  is  worse  than  the  evil.  Once  that  we 
have  reached  the  point  of  separating  the  phenomena  into  the  effects  of  incidence 
and  into  other  effects,  not  perhaps  well  designated,  but  clearly  not  the  effects  of 
incidence,  it  is  taking  a  step  backward  to  chaos  to  catalogue  every  possible  effect 
under  a  rubric  with  no  precise  content  whatever."  Op.  cit.,  p.  31 1.  Finally,  as 
Row-Fogo  says,  "  the  term  '  effects  '  is  itself  open  to  objection.  Rates  may  have 
the  effect  of  injuring  the  health  and  morals  of  occupiers.  ...  If  '  effects '  is  to 
supersede  '  incidence,'  the  term  will  have  to  be  defmed  more  closely.  .  .  . 
'  Effect '  includes  anything."  —  J.  Row-Fogo,  An  Essay  on  the  Reform  of  Local 
Taxation  in  England,  1902,  p.  127,  note  and  p.  131. 


14  Shifting  and  Incidence  of  Taxation 

In  the  narrower  sense,  it  denotes  the  immediate  consequence 
of  each  of  the  above-mentioned  steps.  Thus  shifting  is  an 
effect  of  impact,  incidence  is  an  effect  of  shifting,  and  the 
pressure  of  a  tax  is  an  effect,  in  turn,  of  the  impact  and  of  the 
shifting  as  well  as  of  the  incidence.  In  the  wider  sense,  effect 
denotes  any  of  the  subsequent  results  of  taxation.  A  tax  may 
have  a  great  many  effects.  It  may  diminish  industry  and 
impoverish  individuals ;  it  may  stimulate  production  and 
enrich  individuals  ;  it  may  be  an  unmitigated  curse  to  society  ; 
it  may  be  a  necessary  evil ;  it  may  be  an  unqualified  boon  to 
the  community  regarded  as  a  whole. 

These  problems  are  indeed  important.  They  can,  however, 
not  be  successfully  attacked  unless  we  previously  solve  the 
question  of  shifting  and  incidence.  Scientific  progress  can 
be  made  only  by  a  continually  closer  analysis  and  finer  classi- 
fication. To  discuss  nothing  but  the  "  effects  "  of  taxation  in 
general  would  be  to  render  abortive  the  entire  analysis  which 
has  been  attempted  in  the  preceding  pages.  This  analysis 
has  led  us  to  the  conclusion  that  the  problem  par  excellence 
is  that  of  shifting  and  incidence.  With  the  wider  questions  of 
the  general  effects  of  taxation  the  student  of  incidence  does 
not  primarily  busy  himself.  What  he  has  particularly  to 
investigate  is  the  question  :  On  whom  does  the  tax  ultimately 
fall .''  When  we  once  know  this,  we  can  then  proceed  to  the 
further  discussion  of  the  effects  produced  by  the  pressure  of 
taxation  on  the  various  classes  or  individuals.  The  shifting 
is  the  process  ;  the  incidence  is  the  result ;  the  changes  in  the 
distribution  of  wealth  are  the  effect. 

The  discussion  of  incidence  thus  depends  largely  on  the 
investigation  of  the  shifting  of  taxation.  The  real  problem 
before  us  is  to  ascertain  the  conditions  according  to  which  a 
tax  is  shifted  forward,  backward,  or  not  at  all.  Only  when 
we  understand  whither,  why,  and  how  a  tax  is  shifted,  can  we 
discover  its  actual  incidence  ;  and  it  is  only  when  we  have 
ascertained  the  incidence  that  we  can  proceed  to  discuss  the 
wider  effects  of  a  tax.  In  the  following  pages  an  attempt 
will   accordingly  be    made   to   attack   the    problem  by  first 


Introduction  15 

giving  a  detailed  critical  history  of  the  doctrine  of  shifting 
and  incidence,  and  then  taking  up  the  positive  theory  itself. 
In  the  second  part,  which  deals  with  the  constructive  doc- 
trine in  its  most  recent  aspects,  it  will  be  convenient  to  begin 
with  a  statement  of  some  general  principles,  to  follow  this  with 
a  consideration  of  the  chief  separate  taxes,  one  by  one,  and  to 
close  by  drawing  the  general  conclusions  applicable  to  the 
science  of  finance. 


PART   I 

THE    HISTORY    OF    THE    DOCTRINE    OF 
INCIDENCE 


GENERAL  SURVEY 

The  writers  on  the  shifting  and  incidence  of  taxation,^  like 
those  on  almost  all  other  economic  topics,  may  be  broadly 
divided  into  two  classes,  marked  off  from  each  other  by  the 
period  in  which  the  theory  of  distribution  was  formulated  by 
the  Physiocrats  and  Adam  Smith.  The  doctrine  enunciated 
by  the  first  class  of  writers  —  almost  exclusively  English  — 
may  be  summed  up  under  the  head  of  "  The  Early  Theories." 

The  English  literature  on  taxation,  prior  to  Adam  Smith, 
begins  at  about  the  middle  of  the  seventeenth  century.  For 
somewhat  more  than  a  hundred  years,  the  theories  on  the 
incidence  of  taxation  are  found,  with  a  few  important  excep- 
tions, in  occasional  pamphlets  written  to  advocate  or  to 
oppose  practical  measures  of  reform.  It  was  not  until  a  few 
decades  before  Adam  Smith  that  a  consideration  of  the  gen- 
eral theory  of  incidence  assumed  a  more  prominent  place 
in  the  treatises  on  economic  topics.  The  propositions  of  the 
statesmen  as  well  as  of  the  pamphleteers  of  the  earlier  period 
rest,  however,  on  more  or  less  definite  theories  of  incidence. 

1  The  only  works  which  contain  a  history  of  the  theory  of  incidence  are  the 
German  works  of  J.  Kaizl,  Die  Lehre  von  der  Ueberwalzung  der  Steuern,  1882, 
and  G.  v.  Falck,  Kritische  Riickblicke  auf  die  Entwickelung  der  Lehre  von  der 
Steueriiherwalzung  seit  Adam  Smith,  1882.  Both  these  works  deal  only  with  the 
modern  theories,  and  even  for  this  period  they  are  inadequate.  Whole  classes  of 
authors  are  omitted,  among  them  some  important  ones.  Each  work  is  chrono- 
logical, and  makes  little  attempt  to  analyze  the  theories  according  to  schools. 
Falck  is  richer  in  the  account  of  the  early  German  writers.  Kaizl  is  better  ac- 
quainted with  several  of  the  French  authors,  although  he  omits  some  of  the  most 
noteworthy.  Both  neglect  the  English  authors,  with  the  exception  of  Smith, 
Ricardo  and  Mill,  and  ignore  the  Continental  and  American  writers.  Falck  is 
almost  without  any  positive  ideas  at  all,  while  Kaizl  adheres  so  closely  to  one 
or  two  German  predecessors  that  his  own  constructive  work  is  slight.  Both 
books  are,  however,  to  be  recommended  as  the  only  ones  that  we  possess  on  the 
subject.  The  abler  work,  originally  written  as  a  doctor's  dissertation,  is  that  of  Dr. 
Kaizl,  who  subsequently  attained  a  prominent  position  as  professor  in  the  Uni- 
versity of  Prague  and  as  author  of  numerous  economic  treatises  in  Bohemian, 
and  who  at  one  time  occupied  the  post  of  Minister  of  Finance  in  the  Austro- 
Hungarian  monarchy. 

»9 


20  General  Survey 

It  may  conduce  to  clearness  to  classify  these  pioneers  accord- 
ing to  their  practical  inferences  from  the  doctrine  of  inci- 
dence. From  this  point  of  view,  the  writers  before  Adam 
Smith  may  be  divided  into  six  categories,  as  follows :  — 

1.  Those  who  discuss  the  general  excise. 

2.  Those  who  favor  a  single  tax  on  luxuries.^ 

3.  Those  who  favor  a  single  tax  on  houses. 

4.  Those  who  favor  a  general  property  tax. 

5.  Those  who  favor  a  single  tax  on  land. 

6.  Those  who  favor  a  more  eclectic  system. 

This  whole  field  of  economic  inquiry  has  thus  far  been  so 
little  cultivated,  and  many  of  the  works  referred  to  are  now 
so  rare  that  it  may  be  wise  to  treat  this  section  of  the  history 
more  fully  than  would  otherwise  be  permissible  in  a  work 
which  pretends  to  give  only  a  general  sketch  of  the  historical 
development  of  the  doctrine  of  incidence. 

The  views  developed  in  the  period  subsequent  to  the 
Physiocrats  and  Adam  Smith,  which  will  be  discussed  in 
Book  II.  under  the  title  of  "The  Modern  Doctrines,"  are 
somewhat  more  difficult  to  subdivide  with  accuracy;  for  it 
is  not  always  easy  to  draw  the  line  sharply  between  writers 
many  of  whom  have  much  in  common.  Nevertheless,  their 
theories  of  the  incidence  of  taxation  may  be  conveniently 
classified  as  follows  :  — 

1.  The  Physiocratic  theory. 

2.  The  Absolute  theory. 

3.  The  Diffusion  theory. 

(a)  The  Optimistic  theory. 
{b)  The  Pessimistic  theory. 

4.  The  Capitalization  theory. 

5.  The  Eclectic  theory. 

6.  The  Agnostic  theory. 

7.  The  Socialistic  theory. 

8.  The  Quantitative  or  Mathematical  theory. 

1  The  word  "single"  is  not  here  used  in  opposition  to  "double."  The  phrase 
denotes  a  general  tax  on  luxuries  as  the  exclusive  tax. 


BOOK   I 

THE  EARLY  THEORIES 


CHAPTER   I 

Those  who  discuss  the  General  Excise 

By  the  term  "  excise "  is  meant  a  tax  on  commodities, 
levied  on  the  producer  or  the  domestic  dealer.  It  is  distinct 
from  customs  duties  which  are  levied  on  the  importer ; 
although,  after  commodities  have  once  been  imported,  an 
internal  duty  or  excise  may  also  be  levied  on  them.  These 
internal  taxes  or  excises  are  popularly  supposed  to  be  shifted 
to  the  consumer  and,  accordingly,  while  they  are  imposed  in 
first  instance  on  the  producer  or  dealer  they  are  commonly 
classed  as  indirect  taxes  on  consumption.  The  English 
publicists,  however,  were  by  no  means  unanimous  in  accept- 
ing this  popular  view.  We  may,  in  fact,  distinguish  no  less 
than  four  different  theories  as  to  the  incidence  of  the  excise. 
These  theories  are  :  — 

1.  That,  while  the  excise  is  at  first  shifted  from  the  dealers 

to  the  consumers,  it  will  not  finally  rest  on  the  poor 
consumers. 

2.  That  the  excise  will  rest  on  consumers  in  general. 

3.  That  the  excise  will  be  shifted  to  the  landowners. 

4.  That  the  excise  will  finally  rest  on  the  dealers  or  traders. 

The  earliest  writers  to  propose  a  system  of  excises  did  not 
look  much  farther  than  the  surface  fact  that  the  excise  was 
a  tax  on  a  consumable  commodity,  and  therefore  presumably 
a  tax  on  consumption.  Their  ideal  was  a  tax  on  expenditure, 
and  this  ideal,  in  their  opinion,  could  be  most  easily  attained 
by  a  general  excise.  Although  this  project  was  a  favorite 
one  with  many  of  the  early  authors,  it  gradually  met  with 
opponents  as  well  as  with  adherents  until,  under  Walpole,  it 

23 


24  Shifting  and  Incideytce  of  Taxation 

became,   in  the  second  quarter   of   the   eighteenth   century, 
the  subject  of  a  fierce  controversy.^ 

The  first  English  writer  to  posit  expenditure  as  the  basis 
of  taxation  was  Hobbes,  in  a  work  written  shortly  after  the 
imposition  of  the  first  excise  in  1643.  Hobbes,  like  many 
of  the  later  continental  tax  reformers,  held  a  tax  on  expense 
to  be  a  logical  corollary  of  the  doctrines  of  equality  and 
universality  of  taxation.  To  tax  property,  he  thought,  would 
be  to  discourage  thrift  and  to  put  a  premium  on  extrava- 
gance ;  while,  since  everybody  consumes  something,  a  tax  on 
expense  cannot  possibly  be  evaded  like  so  many  of  the  other 
taxes.^  The  scheme  of  the  excise  itself  was  soon  adopted  by 
several  writers.  Thus  Cradock  states  that  "the  Generall 
Excise  (so  much  decryed  and  Petitioned  against)  in  its 
proper  Constitution,  is  the  most  equitable  of  Impossitions : 
no  man  being  charged  with  it,  but  he  that  sels  it  for  profit, 
to  the  consumption  of  the  Commodity,  who  in  truth  pays  it 

^  Those  who  care  to  go  into  the  literary  history  of  the  controversy  over  th 
famous  "  excise-scheme,"  which  was  in  reality  no  scheme  for  a  general  excise  at 
all,  are  referred  to  the  monographs  of  Leser,  Ein  Accisestreit  in  England, 
Heidelberg,  1875,  and  of  Ricca-Salerno,  Le  dottrine  finanziarie  in  Jnghilterra 
tra  la  fine  del  secolo  XVII  e  la  prima  meta  del  XVIII,  Bologna,  1888.  A  list 
of  additional  contemporary  pamphlets  may  be  found  in  the  bibliography  printed 
by  Sinclair,  History  of  the  Public  Revenue  of  the  British  Empire,  3d  ed.,  1804, 
vol.  iii,  appendix,  pp.  94-136.  Many  of  the  monographs  discussed  by  Leser 
and  Ricca-Salerno  do  not  dwell  on  the  question  of  incidence.  So  far  as  they  do 
discuss  the  subject,  they,  as  well  as  other  works  of  the  same  period  not  mentioned 
by  the  German  and  Italian  writers,  will  be  considered  in  the  following  pages. 

2  "  The  Equality  of  Imposition  consisteth  rather  in  the  Equality  of  that  which 
is  consumed,  than  of  the  riches  of  the  persons  that  consume  the  same.  For  what 
reason  is  there,  that  he  which  laboureth  much,  and  sparing  the  fruits  of  his  labour, 
consumeth  little,  should  be  more  charged,  then  he  that  living  idlely,  getteth  little, 
and  spendeth  all  he  gets;  seeing  the  one  hath  no  more  protection  from  the 
Common-wealth  then  the  other  ?  But  when  the  Impositions  are  layd  upon  those 
things  which  men  consume,  every  man  payeth  Equally  for  what  he  useth :  Nor  is 
the  Common-wealth  defrauded,  by  the  luxurious  waste  of  private  men." — Levia- 
than, or  the  Matter,  Forme,  and  Power  of  a  Common-zvealth  Ecclesiasticall  and 
Civill.  By  Thomas  Hobbes  of  Malmesbury,  London,  1651,  chap.  30,  part  2, 
p.  181  (reprint  of  1881,  p.  270).  For  a  fuller  statement  of  the  benefit  theory  of 
taxation  on  which  this  passage  is  based,  see  Seligman,  Progressive  Taxation  in 
Theory  and  Practice,  2d  ed.,  1908,  pp.  150-157. 


Those  who  discuss  the  General  Excise 


25 


insensibly  without  Complaint."^  Another  writer  in  speaking 
of  the  Dutch  excise  regards  it  as  "  certainly  the  most  equal 
and  indifferent  tax  in  the  world,  and  least  prejudicial  to  any 
people."^  So  familiar  indeed  did  the  system  become  that 
Culpeper  was  able  to  state  :  "It  hath  alwayes  been  a  received 
Maxim,  That  our  meer  Consumption  can  scarce  be  too  heavily 
excised."  ^  And  in  another  passage  he  remarks  that :  "  Do- 
mestick  Excise  in  a  thriving  State  hath  no  fellow,  it  carries 
no  Compost  from  the  Soyl,  and  even  the  Labourer  pays  it 
cheerfully  when  work  is  quick."  ^ 

The  excise,  however,  did  not  exist  long  before  the  pam-  ^ 
phleteers  began  to  have  more  decided  views  as  to  its  inci- 
dence.    Thus  began   the  differences  of   opinion,  which  we 
shall  now  proceed  to  explain. 

I .  TJie  Excise  docs  not  rest  on  the  Poor  Consumers 

The  first  economist  to  express  any  decided  opinion  on  the 
incidence  of  the  excise  was  the  famous  advocate  of  the  Mer- 
cantilist theories,  Thomas  Mun.     He  discusses  the  tax  systems 

^  An  Expedient  for  Regulating  the  Customes  and  Excise.  Approved  by  divers 
well  affected  Marchants,  and  others  of  the  Citty  of  London.  By  Francis  Cradock. 
Marchant.     London,  1659,  p.  i. 

2  England^ s  Interest  Asserted  in  the  Improvement  of  its  Native  Commodities  ; 
and  more  especially  the  Mantifacturc  of  Wool.  By  a  true  Lover  of  his  Majesty 
and  Native  Country.     London,  1669,  p.  t^t,. 

^  A  Discourse  shewing  the  many  Advantages  which  will  accrue  to  this  Kingdom 
by  the  abatement  of  US  UR  Y,  together  with  the  Absolute  necessity  of  Reducing  Interest 
of  MONE  V  to  the  lowest  rate  it  bears  in  other  Countreys,  That,  at  least,  we  may 
Trade  with  our  Neighbours  upon  Equal  Termes.  Humbly  presented  to  the  High 
Court  of  Parliament  now  Sitting.  By  Sir  Tho.  Culpeper,  jun.  Kt.  London,  1668, 
p.  3.  The  title  of  the  work  explains  why  Culpeper  follows  up  the  passage  in  the 
text  by  the  admonition  :  "Then  tax  Usury,  there  is  no  Consumption  like  it;  Excise 
the  Excise-man,  for  Usury  is  the  grand  Excise  upon  our  Land  and  Trade." 

*  Ibid.,  p.  2.  Culpeper  is  opposed  to  any  further  taxation  of  land,  and  expresses 
himself  vigorously  as  follows :  — 

"  Can  the  Land  bear  it?  Surely  No,  if  it  be  not  limited  to  the  present  distress, 
and  sweetened  with  some  Recompense :  Alas !  Land  is  at  its  last  Gasp,  and 
ready  to  give  up  the  Ghost,  without  a  powerful  Cordial :  Most  Parishes  can 
already  present  some  Farms  wholly  deserted.  Neither  Tenant  being  willing  to  hire, 
nor  Owner  able  to  stock  them;   Many  stocked  but  two  halfs,  most  to  loss:     Be- 


2  6  Sliifti7ig  and  Incidence  of  Taxation 

of  Italy  and  Holland,  and  finds  their  essence  to  consist  in 
"  a  custom  on  all  new  wares  transported,  customs  upon  every 
alienation  or  sale  of  live  Cattel,  Lands,  Houses,  and  the  por- 
tions or  marriage  mony  of  women,  license  mony  upon  all 
Victualling  houses  and  Innkeepers,  head  money,  Custom  upon 
all  the  Corn,  Wine,  Oyl,  Salt  and  the  like,  which  grow  and 
are  consumed  in  their  own  dominions."  Now  all  these  seem 
to  be  "  a  rabble  of  oppression  to  make  the  people  poor  and 
miserable."  ^  But  Mun  declares  this  to  be  a  mistake.  For  in 
proportion  as  the  necessaries  of  life  increase  in  price,  the  rate 
of  wages  must  rise  also.  In  the  long  run,  therefore,  the  taxes 
on  the  poor  will  be  shifted  to  the  employers,  and  through 
them  to  the  rich  consumers  of  manufactured  articles.^  This 
is  a  good  thing,  because  the  rich  will  thus  be  "  forced  to  abate 
their  sinful  excess  and  idle  retainers."^  Mun's  idea,  it  is 
plain,  is  that  taxes  on  consumption  are  to  be  commended 
because  they  will  be  shifted  to  the  employing  producer ;  or, 
at  all  events,  that  they  must  not  be  regarded  as  falling  on  the 
consumption  of  the  mass  of  the  community. 

Other  writers  furthered  the  doctrine  that  the  excise  did 
not  rest  on  the  mass  of  consumers  by  advocating  the  wider 
theory  that  taxes  in  general  are  really  no  burden.  Thus, 
Waterhouse  maintained  that  "  money  raised  upon  the  poorer 
sort,  returns  to  them  again  "  in  the  shape  of  increased  em- 
sides,  Land  is  like  the  heart,  from  which  all  the  other  Members  must  receive  their 
Life  and  Vigour ;  Great  reason  therefore  have  we  to  cherish  our  Land,  unless  we 
will  reduce  our  selves  to  the  state  of  a  meer  Colony;  which  would  manifestly  end 
in  our  Desolation  and  Conquest." 

1  England'' s  Treasure  by  Forraign  Trade,  or,  the  Ballance  of  our  Forraign 
Trade  is  the  Rule  of  our  Treasure.  By  Thomas  Mun.  1664,  chap.  xvi. :  "How 
the  revenues  and  incomes  of  princes  may  justly  be  raised,"  pp.  151,  152. 

*  "Neither  are  these  heavy  Contributions  so  hurtfuU  to  the  happiness  of  the 
people,  as  they  are  commonly  esteemed :  for  as  the  food  and  rayment  of  the  poor 
is  made  dear  by  Excise,  so  doth  the  price  of  their  labour  rise  in  proportion; 
whereby  the  burden  (if  any  be)  is  still  upon  the  rich,  who  are  either  idle,  or  at 
least  work  not  in  this  kind,  yet  have  they  the  use  and  are  the  great  consumers  of 
the  poors  labour."  —  Ibid,,  p.  154  (p.  85  of  the  reprint  of  1895  ^^  Ashley's  Series 
of  Economic  Classics). 

*  Ibid.,  p.  155. 


Those  who  discuss  the  General  Excise  27 

ployment  or  higher  wages,  and  that  a  tax  must  be  looked 
upon  as  a  loan,  the  proceeds  of  which  soon  come  back  to  the 
taxpayers.'  Another  writer  laid  down  the  proposition  that 
"  Impositions  upon  a  People  make  them  thrive,"  ^  and  that 
"Taxes  are  no  Charge  either  to  the  Kingdom  in  general,  or  to 
particular  Persons;  but  on  the  contrary  a  Gain  to  all."^  His 
chief  arguments  to  prove  this  assertion  are,  first,  that  since 
taxes  are  employed  on  court  or  for  war  they  make  money 
circulate,  and,  secondly,  that  "  the  poor  are  employed  by 
Taxes,  and  are  by  that  means  taken  off  from  being  a  Charge 
to  the  Kingdom."*  The  author  goes  even  farther  than 
Waterhouse ;  for  while  the  latter  contented  himself  with 
calling  taxes  a  species  of  loan,  the  former  maintains  that  they 
ought  properly  to  be  regarded  as  the  poor  man's  bank,  which 
supports  him  in  distress.^  Of  all  taxes,  none  appears  to  him 
so  good  as  the  excise,  "  which  indeed  seems  of  all  Taxes  the 
most  equal :  for  that  no  man  by  it  can  be  said  to  be  oppressed, 

"^  "  What  money  the  people  bestow  upon  his  Majesty  in  Leavies  and  assess- 
ments, his  Majesty  returns  to  his  people  in  wages,  pay,  exchange  and  Merchan- 
dize, what  he  receives  for  his  care,  he  payeth  them  for  their  Labour;  what  is  paid 
to  his  Exchequer  is  returned  to  their  Markets :  there  is  a  circle  in  the  veine  of  Gold 
and  Silver  as  in  that  of  blood.  .  .  .  This  money  is  not  lost,  but  /<?«/.  .  .  .  What 
the  Gentry  take  from  you  with  one  hand,  they  give  you  with  another;  what  their 
power  ruling  over  you  calls  for  in  contribution,  their  goodness  in  employing  you 
bestows  upon  you  in  wages."  —  One  Tale  is  good,  until  another  is  told,  or,  Some 
sober  Rejlections  upon  the  Act  for  Chimney- Money.  Drawn  up  for  the  Use  of 
some  Neighbors,  and  thought  usefull  to  be  communicated  to  the  good  people  of  this 
NATION.     By  William  Waterhouse,  Esq.,  London,  1662,  pp.  29,  30. 

2  Taxes  no  Charge:  in  a  Letter  frotn  a  Gentleman,  to  a  Person  of  Qualitye 
Shelving  the  Nature,  Use,  and  Benefit  of  Taxes  in  this  Kingdom  ;  and  compared 
with  the  Impositions  of  Foreign  States.     London,  1690,  p.  5. 

*  Ibid.,  p.  9. 

*  Ibid.,  p.  13.  Additional  reasons  are  that  "the  worst  members  in  the  Com- 
monwealth (viz.)  the  Extravagant  and  Debauch'd"  really  pay  the  taxes,  and 
that  so  far  as  taxes  consist  of  customs  duties,  they  "  Keep  out  a  Destructive 
Trade." 

*  "  'Tis  a  vulgar  error  to  believe  that  Taxes,  even  to  the  meanest  Man  is  a 
Charge,  for  that  his  Mite  is  with  increase  return'd  by  the  expence  of  that  which 
would  never  have  seen  day,  but  by  the  force  of  a  Law;  so  that  publick  Taxes,  ex- 
pended in  our  own  Country,  may  be  accounted  the  poor  and  the  Mechanick's  bank, 
by  which  they  are  employed,  and  maintained." —  Ibid.,  pp.  17,  18. 


28  Shifting  and  Incidejice  of  Taxation 

he  being  his  own  Assessor,  and  pays  but  what  he  pleases, 
according  to  his  Expence."  ^ 

Another  anonymous  pamphleteer  of  the  same  period  agrees 
that  "  Excises  are  the  most  equal  and  less  grievous  Tax  of 
all  others,"  and  believes  that  a  moderate  tax  will  not  be  felt 
to  such  an  extent  as  to  hinder  consumption  at  all.^  "  Who 
would  ever  use  the  less  Sugar,  if  one  peny  Excise  were  paid 
out  of  twelve  peniworth  ?  Who  would  use  the  fewer  Ribbons, 
for  2d.  Excise  upon  every  I2d.  ?  Who  would  play  the  less 
at  Cards  or  Dice,  if  3d.  were  paid  out  of  I2d.  t  What  Lady 
would  ever  forbear  to  wear  Pearls  or  Diamonds,  or  to  buy 
Fans  and  Looking-Glasses,  if  4d.  were  laid  upon  every  i2d. } " 
Our  author's  confidence  in  the  harmlessness  of  a  tax  amount- 
ing to  one-third  of  the  value  of  a  commodity  would,  perhaps, 
not  be  shared  by  many  of  the  present  day. 

These  views  of  Mun  and  his  successors  as  to  the  virtual 
immunity  of  the  mass  of  consumers  from  the  weight  of  taxa- 
tion did  not,  however,  make  much  headway.  During  the 
following  decades  the  opinion,  to  be  discussed  in  the  next 
section,  that  the  excise  was  a  real  burden  on  the  poorer  con- 
sumers, gradually  gained  ground.  But  toward  the  middle  of 
the  eighteenth  century,  isolated  writers  reverted  to  the  theory 
of  Mun.  Of  these,  none  is  more  remarkable  than  Fauquier. 
He  gives  a  most  lucid  and  vigorous  argument,  designed  to 
show  that  a  tax  on  the  workingman,  whether  a  direct  tax  on 
wages  or  an  excise  on  the  necessaries  of  life,  will  inevitably 
be  shifted  from  his  shoulders.  Fauquier  puts  his  general 
principle  as  follows :  "  The  Poor  do  not,  never  have,  nor  ever 
possibly  can,  pay  any  Tax  whatever.     A  man  that  has  noth- 

^  Taxes  no  Charge,  p.  25.  Although  the  author  opposes  the  benevolences, 
monopolies,  alterations  of  money  and  taxes  on  polls,  offices  and  travellers,  he  sug- 
gests a  supplement  to  the  general  excise  through  taxes  on  Jews,  playhouses  and 
"  the  Vermin  of  the  Nation,  lewd  Persons  of  both  Sexes."  It  is  no  wonder  that 
he  confesses  in  another  place :  "  thus  I  have  huddl'd  together  a  mixt  Discourse." 
—  Ibid.,  p.  19. 

2  A  familiar  Discourse  between  George,  a  true-hearted  English  Gentleman, 
and  Hans,  a  Dutch  Merchant:  Concerning  the  present  Affairs  of  England. 
London,  1672,  pp.  37,  38. 


TJiose  who  discuss  the  General  Excise  29 

ing  can  pay  nothing."^  He  proceeds  on  the  assumption 
that  wages  are  always  at  the  bare  minimum  of  subsistence. 
If  the  laborer,  therefore,  can  no  longer  live  on  his  usual  in- 
come, whether  this  condition  be  due  to  an  increase  in  the 
price  of  necessaries  or  to  a  forcible  diminution  of  his  wages 
through  a  tax,  his  nominal  wages  must  rise  in  proportion.^ 
In  fact,  Fauquier  believes  that  in  many  cases  his  wages  will 
rise  more  than  in  proportion  to  the  tax.  But  this  he  does  not 
attempt  to  prove.  He  does,  indeed,  try  to  show  that  when  a 
tax  is  imposed  on  the  producer  or  the  seller  of  commodities, 
a  sum  over  and  above  the  tax  will  be  shifted  to  the  pur- 
chaser.^ But  even  if  this  conclusion  were  valid  as  to  profits, 
the  reasoning  would  not  be  applicable  to  wages.  However 
this  may  be,  Fauquier  is  quite  positive  that  taxes  rest  only  on 
the  rich  consumer,  "that  is,  the  Man  of  Fortune  who  lives  on 
his  Income."  And  this  is  true,  "even  in  those  Taxes  which 
are  said  mostly  to  affect  the  Poor,  and  which  they  seem,  at 
first  Sight,  to  pay  out  of  their  own  Pockets."* 

Fauquier,  indeed,  differed  from  Mun  in  his  practical  con- 
clusions. For  while  Mun  advocated  the  general  excise,  Fau- 
quier opposed  it  on  the  ground  that  the  same  result  —  that 

1  An  Essay  on  Ways  and  Means  for  raising  Money  for  the  Support  of  the 
Present  War,  without  increasing  the  Public  Debts.  By  F.  F.  (Fauquier),  Lon- 
don, 1756,  p.  17. 

-  "  If  Taxes  are  laid  on  Ivabour  meerly,  or  on  such  Articles  as  the  meanest 
Labourer  must  want  and  use,  he  will  still  live,  and  his  Wages  must  be  raised."  — 
Ibid.,  p.  20. 

'  "  If  by  Taxes  .  .  .  the  common  Necessaries  of  Life  become  so  dear,  that 
a  Labourer  cannot  live  at  the  usual  Wages,  the  Price  of  Labour  must  rise  in 
Proportion  thereto." — Ibid.,  pp.  19,  20. 

*  Ibid.,  p.  20.  A  similar  argument  is  found  in  a  pamphlet  of  almost  the  same 
date,  entitled  The  Man's  mistaken  who  thinks  the  Taxes  so  grievous  as  to  render 
the  Nation  unable  to  maintain  a  War.  By  an  old  Englishman.  London,  1755, 
esp.  p.  II.  This  is  largely  a  plagiarism  from  an  earlier  one,  also  written  during- 
a  war  :  The  Taxes  not  Grievous  and  therefore  not  a  Reason  for  an  Unsafe  Peace. 
London,  1712.  As  soon  as  the  war  was  over,  however,  a  different  opinion  was 
expressed ;  as,  notably,  in  The  Nature  and  Weight  of  the  Taxes  of  the  Nation  : 
shewing  that,  by  the  continuance  of  Heavy  Taxes  and  Impositions  .  .  .  Trade  is 
destroyed,  the  Poor  increased ;  and  the  Miseries  and  Misfortunes  of  the  whole 
Kingdom  demand  the  Consideration  of  the  Freeholders.     London,  1722. 


30  Shifting  and  Incidence  of  Taxation 

of  taxing  expense  —  might  be  more  conveniently  attained  in 
another  way.^  The  point  of  interest  to  us  here,  however,  is 
that  both  writers  agreed  in  the  behef  that  an  excise  would 
not  rest  on  the  poor  consumer,  but  would  be  shifted  to  the 
employer,  and  that  if  we  can  speak  of  an  excise  resting  at  all 
on  the  consumer,  it  is  the  rich  consumer  that  is  meant.  This 
doctrine  was  later  accepted  by  Sir  James  Steuart^and  be- 
came a  part  of  the  classical  doctrine,  as  elaborated  by  Adam 
Smith  and  Ricardo. 

2.    The  Excise  rests  on  Consigners  in  General 

By  far  a  majority  of  the  writers  believed  that  the  excise 
rested  on  the  mass  of  consumers  in  general,  irrespective  of 
the  fact  whether  they  were  poor  or  rich.  This  broad 
theory  was  ushered  in  by  the  famous  economist  and  statisti- 
cian, Sir  William  Petty.  Petty  also  has  the  distinction  of 
being  the  first  English  writer  to  devote  an  entire  work  to  the 
subject  of  taxation.^  It  will  repay  us,  therefore,  to  dwell 
somewhat  more  fully  on  the  general  theory  of  incidence  that 
is  found  in  his  book. 

Petty  first  discusses  the  procuring  of  revenue  from  land, 
which  he  says  can  be  done  in  two  ways,  —  either  by  "  setting 
apart  a  proportion  of  the  whole  Territory  for  Publick  Uses," 
or  by  "  an  excision  of  the  land  by  way  of  assessment  or  land 
taxe."  Such  a  land  tax,  where  "  an  aliquot  part  of  every 
Landlords  Rent  were  excinded  or  retrenched,"  is  good  in  a 
new  country,  where  a  certain  quit-rent  is  reserved  beforehand, 
because  it  will  be  borne  partly  by  the  landlord,  but  also  partly 
by  the  consumers.  For  "it  is  not  onely  the  Landlord  pays, 
but  every  man  who  eats  but  an  Egg,  or  an  Onion  of  the 
growth  of  his  Lands ;  or  who  uses  the  help  of  any  Artisan, 
which  feedeth  on  the  same."*  In  old  countries,  like  Eng- 
land, he  continues,  where  rents  are  fixed  for  a  long  time,  such 

^  See  below,  p.  91. 
2  See  below,  p.  54. 

*  A  Treatise  of  Taxes  and  Contributions.   [By  William  Petty.]    London,  1667. 

*  Ibid.,  p.  20. 


Those  who  discuss  the  General  Excise  31 

a  tax  would  be  unjust,  because  it  would  benefit  only  the  land- 
lords who  renew  their  rents.  These  gain  doubly,  "  one  way 
by  the  raising  of  their  Revenues,  and  the  other  by  enhansing 
the  prices  of  provisions  upon  them."  For  the  tax  "  doth  ulti- 
mately light  upon  the  consumptioners,"  or,  as  he  again  puts 
it,  a  "  Land-taxe  resolves  into  an  irregular  Excize  upon  Con- 
sumptions, that  those  bear  it  most,  who  least  complain."  ^ 

Petty  also  discusses  the  house  tax  or  "  an  Excisium  out  of 
the  Rent  of  Houseing."  He  deems  the  influence  of  this  much 
more  uncertain  than  that  of  land,  "  for  an  House  is  of  a  double 
nature,  viz.  :  one,  wherein  it  is  a  way  and  means  of  expence ; 
the  other,  as  'tis  an  Instrument  and  Tool  of  gain.  .  .  .  Now 
the  way  of  a  Land-taxe  rates  housing,  as  of  the  latter  nature, 
but  the  Excise  as  of  the  former." ^  From  which  it  may  be 
inferred  that  Petty  thinks  a  house  tax  will  be  shifted  to  the 
consumer  or  occupier,  and  will  be  shifted  further  on  to  con- 
sumers when  the  occupier  himself  is  a  producer. 

In  regard  to  "  customs,"  both  "  outwards  "  and  "  inwards," 
Petty  assumes  that  they  will  be  shifted  to  the  consumers,  and 
concerns  himself  primarily  with  stating  the  principles  on 
which  they  should  be  levied.  His  chief  objection  to  customs 
duties  is  that  they  are  frequently  imposed  on  articles  which 
serve  as  the  raw  materials  for  further  production,  or,  as  he 
puts  it,  "  that  Duties  are  laid  upon  things  not  yet  ripe  for  use, 
upon  Commodities  in  fieri,  and  but  in  the  way  of  their  full 
improvements."  ^  Poll-money,  which  he  opposes  because  of 
its  inequality,*  he  thinks  cannot  be  shifted.  He  concludes 
that  a  general  excise  is  the  best  of  all  taxes,  and  assumes 
that,  while  it  will  be  transferred  to  the  general  consumer,  it 
cannot  be  shifted  any  further.     In  this  respect  it  is  superior 

*  A  Treatise  of  Taxes  and  Contributions,  p.  21. 
2  Ibid.,  p.  21. 

'  Ibid.,  p.  36.  "This,"  he  later  adds,  "is  the  reason  why  I  think  the  Leavy 
we  commonly  call  Customs  to  be  unseasonable  and  preposterous,  the  same  being 
a  payment  before  consumption."  —  Ibid.,  p.  70. 

*  Petty  grows  very  indignant  over  the  English  system :  "  so  as  by  this  Confu- 
sion, Arbitraries,  Irregularities,  and  hotch  pot  of  Qualifications,  no  estimate  could 
be  made  of  the  titness  of  this  Plaister  to  the  Sore."  —  Ibid.,  p.  41. 


32  Shifting  a7id  Incidence  of  Taxation 

to  the  land  and  house  taxes;  for  these,  as  we  have  seen,  are 
only  partially  shifted  to  the  consumer. 

Petty's  views  on  the  general  property  tax  are  interesting  as 
showing  in  this,  the  first  book  on  the  theory  of  taxation,  a 
recognition  of  the  defects  of  the  system  which  was  gradually 
coming  to  its  close  in  England.  After  recounting  the  many 
defects  and  abuses  connected  with  the  system,^  he  closes 
with  the  statement :  "  I  have  not  patience  to  speak  more 
against  it :  daring  rather  conclude  without  more  ado,  in  the 
words  of  our  Comick  to  be  naught,  yea  exceeding  naught, 
very  abominable,  and  not  good."  In  another  work,  how- 
ever. Petty  seems  still  to  pin  some  faith  on  the  chance  of 
reaching  personal  property.^ 

This  is  not  the  place  to  discuss  Petty's  many  reasons  for 
favoring  expenditure  as  the  basis  of  taxation.^  It  will  suffice 
for  our  purposes  to  state  that,  starting  out  from  the  principle 
that  a  tax  on  expense  is  the  ideal  form  of  taxation,  Petty  ad- 
vocates the  general  excise  as  reaching  this  result  most  surely 
and  most  speedily.  He  discusses  the  plan  of  levying  a 
single  tax  on  some  one  object  of  expenditure,  termed  by  him 
the  "Accumulative  Excise"  or  tax  "upon  some  one  single 
particular,"  which  may  be  deemed  "  to  be  nearest  the  com- 
mon standard  of  all  Expense."  But  he  prefers  the  scheme 
of  levying  a  tax  upon  "every  particular  Necessary,  just  when 
it  is  ripe  for  Consumption."*     Still,  as  he  himself  sees  that 

1  "  There  have  been  in  our  times,  ways  of  levying  an  aliquot  part  of  mens  Es- 
tates, as  a  Fifth,  and  Twentieth,  viz.  of  their  Estates  real  and  personal,  yea,  of  their 
Offices,  Faculties,  and  imaginary  Estates  also,  in  and  about  which  way  may  be  so 
much  fraud,  collusion,  oppression,  and  trouble,  some  purposely  getting  themselves 
taxed  to  gain  more  trust :  Others  bribing  to  be  taxed  low,  and  it  being  impossible 
to  check  or  examine,  or  trace  these  Collections  by  the  print  of  any  footsteps  they 
leave  (such  as  the  Hearths  of  Chimney  are)."  —  A  Treatise  of  Taxes,  pp.  6i,  62. 

2  He  hazards  the  conjecture  that  "  assessments  upon  personal  estates,  if  given 
in  as  elsewhere  upon  oath,  would  bring  that  branch  which  of  itself  is  most  dark  to 
a  sufficient  clearness." —  Verbum  Sapienti;  or  .  .  .  the  Method  of  raising  Taxes 
in  the  most  equal  manner,  p.  17  (Appended  to  his  Political  Anatomy  of  Ireland, 
edition  of  1691).      Cf  Seligman,  Essays  in  Taxation,  p.  48. 

3  They  may  be  found  in  chap.  xv.  of  A  Treatise  of  Taxes. 

*  This  he  terms  "the  very  perfect  Idea  of  making  a  Leavy  upon  Consump- 
tions."—  Ibid.,  p.  69. 


Those  who  discuss  the  General  Excise  2>'h 

this  may  be  "  too  laborious,"  Petty  suggests  as  an  alternative 
scheme  that  "we  ought  to  enumerate  a  Catalogue  of  Com- 
modities, such  whereof  accompts  may  be  most  easily  taken," 
but  "  being  withall  such,  as  are  to  be  as  near  Consumption  as 
possible." 

The  views  of  Petty  gradually  diffused  themselves  through- 
out the  community,  keeping  pace  with  the  ever-widening  use 
of  indirect  taxes  on  consumption.  Many  of  the  writers  of  the 
close  of  the  seventeenth  century  now  became  ardent  advocates 
of  the  general  excise.  The  author  of  an  interesting  pam- 
phlet, after  giving  a  definition  of  excise,^  proceeds  to  explain 
that,  although  the  "  makers  or  Factors  "  of  commodities  ad- 
vance the  money,  they  really  shift  the  tax  to  the  public  with- 
out the  latter  being  aware  of  it.  This  constitutes,  in  his  eyes, 
the  great  advantage  of  the  excise;  for  if  the  tax  were  imposed 
directly  on  the  consumers,  it  would  give  rise  to  great  com- 
plaint.^ The  author  is  very  careful,  however,  to  emphasize 
the  necessity  of  taxing  only  those  articles  which  are  neces- 
saries of  life  and  in  universal  use.  In  this  way,  he  asserts, 
not  only  will  the  revenue  be  large,  but  the  principle  of  uni- 
versality of  taxation  will  be  carried  out.^ 

Another  writer  of  the  period  lays  stress    rather  on   the 

1  ii  When  we  speak  of  an  Excise,  we  mean  .  .  .  the  whole  Duties  of  any  kind 
whatsoever,  that  are  charged  upon  any  Goods  or  Commodities  expended  within 
the  Kingdom."  —  A  Discourse  {by  way  of  Essay)  humbly  offered  lo  the  Considera- 
tion of  the  Honourable  House  of  Commons,  towards  the  liaising  Moneys  by  an 
Excise,  demonstrating  the  Conveniency  of  Raising  Moneys  that  Way.  By  W.  C, 
Esq.     London,  1695/6,  p.  3. 

2  "The  Money  being  deposited  by  the  Makers  or  Factors  who  take  it  again,  in 
the  Price  of  them,  at  the  Sale,  the  People  pay  it  insensibly  in  the  Value  of  the 
Goods  they  buy;  for  we  must  not  think  that  the  Merchants  or  Traders  pay  all  the 
Money  of  the  Customs  and  Excise ;  they  are  but  the  Depositors  of  it,  and  the  Peo- 
ple paying  it  in  a  way  so  secret  and  insensible,  it  meeteth  not  with  any  Contradic- 
tion from  them,  as  it  would  do,  were  they  themselves  to  lay  down  the  present 
money. "  —  Ibid.,  p.  4. 

^  This  plan  is  "that  whatsoever  Commodities  be  made  Excisable,  are  to  be  of 
a  large,  universal  and  necessary  Expence :  Of  a  large  Expence,  otherwise,  there 
will  be  a  great  Noise  to  little  Purpose.  If  it  be  of  an  Universal  Expence,  then 
every  Man  will  bear  his  Lot.  If  it  be  of  Necessary  Expence,  there  will  be  no 
avoiding  the  Use  of  that  Commodity."  —  /bid.,  p.  8. 


34  Shifting  and  Incidence  of  Taxation 

principle  of  equality.  He  advocates  the  excise  because  of 
the  breakdown  of  the  general  property  tax,  which  by  that 
time  had  become  known  as  the  land  tax.  "  What  can  be  a 
greater  heart-breaking,"  he  asks,  "  than  to  pay  double  and 
treble  in  proportion  to  other  people."  ^  And  referring  to  the 
great  discrepancy  between  the  theory  and  the  practice  of  the 
general  property  tax,  he  exclaims :  "  but  that  which  was 
well  designed  was  so  villanously  executed  that  even  those 
taxes  proved  shamefully  unequal.  For  experience,"  he  adds, 
"  hath  taught  us  that  men  will  strangely  swear  and  forswear 
to  save  themselves  and  their  neighbours  from  being  screwed 
up."  2  An  excise  will  avoid  all  these  difficulties  and  will 
moreover  be  in  accordance  with  the  doctrine  that  "  every 
man  should  give  something."  Incidentally  it  may  be  re- 
marked that  in  this  writer  we  find  the  first  statement  of  the 
theory  which  was  subsequently  to  play  such  a  great  role,  that 
every  old  tax  is  a  good  tax.  "When  a  man  hath  bled  much, 
if  you  go  to  take  a  further  great  Quantity  from  him,  at  once 
and  presently,  it  may  prove  fatal.  But  after  a  while,  his 
Bloud  being  recruited  and  supplyed,  you  may  take  more  with- 
out hurt  or  danger;  especially  if  you  do  it  by  degrees.  And 
'tis  just  so  with  our  Nation  in  point  of  Taxes." 

The  same  belief  in  the  excise,  on  the  score  of  its  reaching 

'^  A  Proposal  for  an  Equal  Land- Tax,  humbly  submitted  to  Consideration. 
London,  1691,  p.  3. 

"^  Op.  cit.  p.  4.  It  is  for  this  reason  that  he  is  opposed  to  farmers  and  in- 
formers. The  subject  of  farming  the  taxes  was  much  discussed  at  the  time.  An 
early  pamphleteer  defended  it  on  the  ground  that  "  these  taxes  are  subject  to 
infinite  fraud  and  cozenage  whereby  the  subjects  elude  their  payment.  These 
deceits  will  be  most  diligently  enquired  into  by  private  farmers,  as  reaping  so 
much  the  more  profit,  by  how  much  the  more  carefull  they  are  to  detect  and  avert 
these  frauds.  For  men  are  usualy  more  solicitous  about  their  private  Wealth, 
than  for  the  Common-wealth."  —  The  City  Alarum  or  the  Weeke  of  our  miscar- 
riages, which  have  hitherto  obstructed  our  proceedings,  and  will  now  retard  them 
if  not  speedily  removed.  Whereunto  is  annexed  a  Treatise  of  the  Excise.  Lon- 
don, 1645,  p.  32.  The  argument  against  farming  is  put  by  a  later  writer  in  the 
statement  that  "in  a  Farm  the  overplus  of  the  Sum  contracted  for  is  all  sunk 
into  the  Farmer's  Pocket,  whereas  the  whole  Advance  [otherwise]  accrews  to  the 
Publick."  — A  Proposal  for  advancing  the  Pevenue  of  Excise,  humbly  offered  to  the 
Honourable  the  House  of  Commons  in  Parliament  assembled.    London,  1 707,  p.  1 1 . 


Those  who  discuss  the  General  Excise  35 

the  entire  mass  of  the  consumers,  is  found  in  the  work  of 
Burnaby,  who  advocated  an  extension  of  some  of  the  internal 
duties  on  commodities.  His  particular  scheme  was  the  im- 
position of  a  tax  on  malt,  which  in  his  opinion  "  will  be  less 
felt  than  usually  Taxes  are,  by  reason  every  person  will  pay 
Proportionable  in  the  Price  of  Malt."  ^  He  lays  down  his 
general  principle  as  follows  :  "  The  more  universal  any  Tax 
is,  it  is  to  be  supposed  (unless  in  some  Particular  Cases)  to  be 
the  more  equal."  Then  follows  the  minor  premise :  'T  pre- 
sume, no  Person  will  deny  that  such  a  Tax  will  prove  so  uni- 
versal, that  not  any  Person  will  escape  paying  his  Proportion 
according  to  his  consumption."  From  all  of  which  it  is  easy 
to  draw  the  conclusion  that  "  no  Person  can  complain ;  who 
Consumes  little,  will  have  but  little  to  pay." 

A  similar  belief  in  the  advantages  of  a  tax  on  malt  is  found 
in  an  author  of  a  decade  later,  who  favors  the  tax  primarily 
on  the  ground  of  its  equality  and  its  universality.  "  No  tax," 
he  tells  us,  "seems  to  be  so  equal  as  that  upon  malt,"  and  no 
tax  will  be  so  universal  because  "  none  will  be  able  to  evade 
the  full  of  (or  near)  their  proportions."  ^  The  doctrine  of  the 
consonance  of  the  general  excise  or  of  particular  excises  with 
the  canon  of  equality  of  taxation,  on  the  ground  of  reaching 
all  in  proportion  to  their  expenditure  was  especially  empha- 
sized by  Houghton,  who  elaborated  a  scheme  of  taxes  upon  a 
great  variety  of  commodities,  like  leather,  fowl,  fish,  hides, 
and  hops,  as  well  as  on  windmills  and  watermills.  "  If  Equity 
may  take  place  amongst  the  People,  there  will  be  little  Rea- 

^  Two  Proposals,  Humbly  Offered  to  the  Honourable  House  of  Commons,  now 
assembled  in  Parliament.  I.  That  a  Duty  be  laid  on  Malt,  in  the  stead  of  the 
present  Duty  on  Beer  and  Ale.  II.  That  a  Duty  be  laid  on  Malt,  and  the  preS' 
ent  Duty  on  Beer  and  Ale  be  continued.  By  A.  Burnaby,  of  the  Middle-Temple, 
Gent.  London,  1696,  p.  2.  Cf.  p.  24.  Much  the  same  idea  is  contained  in 
another  pamphlet  by  Burnaby,  entitled:  "An  Essay  upon  the  excising  0/  Malt,  as 
also  the  present  Case  of  Tallies  considered.     London,  1696.      Cf.  pp.  23  and  80. 

2  Proposals  to  Supply  His  Majesty  with  Twelve  or  Fourteen  Millions  of  Money 
{or  More  if  Required')  for  the  Year  ibgj,  without  Subscriptions,  or  Advancing 
the  present  Taxes.  By  A.  D.  of  Greys-Inn,  Elsq :,  and  some  others  his  Friends. 
London,  1697,  P-  3- 


36  Shifting  and  Incidence  of  Taxation 

son,"  he  thinks,  "  for  any  to  complain,  why  this  Imposition  or 
Duty  should  not  be  thus  charged."  ^  Some  pamphleteers  went 
a  step  farther  and  defended  the  excise  on  the  ground  that  it 
would  improve  the  quality  of  the  product.  This  position  was, 
for  instance,  taken  by  De  Foe,  in  his  discussion  of  the  excise  on 
ale,  in  an  ingenious  argument.  "  The  strong  ale,"  he  tells  us, 
"  will  rise  in  its  Price,  both  by  reason  of  the  double  Excise,  and 
because  the  Brewers  will  probably  brew  it  stronger,  and 
thereby  raise  its  value  that  it  may  better  bear  the  Excise."  ^ 
Another  writer,  commenting  upon  some  of  Petty's  state- 
ments, puts  very  forcibly  the  case  for  the  general  excise,  of 
which  he  says,  "  I  must  allow,  'tis,  singly  considered,  perhaps 
the  most  equal,  and  Innocent  of  any  particular  way  of  Taxing, 
commonly  proposed  or  discoursed  of."  ^  Not  only  is  every 
man,  he  thinks,  his  own  assessor,  but  the  tax  is  paid  by  the 
final  consumer  almost  unconsciously ;  it  conduces  to  thrift, 
and  it  spares  the  land,  which  is  the  real  source  of  public 
wealth.*     Nevertheless  he  is  alive  to  some  of  its  shortcom- 

1  "  For,"  he  adds,  "  in  these  Duties  every  Person  will  be  taxed,  and  pay  more 
or  less,  according  to  the  Quantity  he  or  she  useth;  if  Poor,  they  use  little,  and 
therefore  Pay  the  less;  if  Rich,  they  Pay  the  more,  in  Proportion  to  what  their 
Expence  and  Consumptions  are ;  so  that  nothing  can  be  more  equally  laid,  and 
Charg'd  upon  the  People,  than  the  Taxes  afore-said."  A  BOOK  OF  FUNDS : 
or.  Some  Reasonable  Projeciions  and  Proposals  for  Poising  Three  Millions  of 
Money  per  Annum,  for  Supplies,  to  be  Granted  His  Majesty.  By  such  Ways  and 
Methods  as  will  be  least  Burthensome  to  the  People,  during  the  War.  Most  Hum- 
bly Offered  to  the  Consideration  of  Both  Houses  of  Parliament.  By  Thomas 
Houghton,  of  Lyme-Street,  Gent.     London,  1695,  p.  13. 

2  The  State  of  the  Excise,  etc.,  vindicated,  from  the  Remarks  of  the  Author  of 
the  Short  View,  etc.,  wherein  some  other  Escapes  of  that  author  are  likewise  taken 
notice  of.      [By  Daniel  De  Foe.]     London,  n.  d.     [c.  1706.] 

3  "  Excepting,"  he  adds,  like  all  the  writers  of  the  time,  "  Imposts  on  some 
Foreign  hurtful  Superfluities,  for  the  due  regulating  of  Trade."  —  A  Letter  from  a 
Gentleman  in  the  Country  to  his  Friend  in  the  City:  touching  Sir  Williafn 
Petty s  Posthumous  Treatise  ;  entitled  Verbum  Sapienti,  etc.  London,  1691,  p.  14. 
This  tract  has  sometimes  been  ascribed,  but  probably  without  good  reason,  to 
Sir  Thomas  Culpeper. 

*  "  It  hath  a  notable  Air  and  Aspect  of  Freedom,  every  one  being  indeed  his  own 
Assessor:  It  rises  almost  insensibly,  bringing  the  Multitude  (who  are  more  apt  to 
murmur  at  integral  Taxes),  without  much  Grudging,  to  pay  their  Quota's  in  this. 
It  affects  not  immediately  the  Fund  of  Land,  as  our  sole  Land-Taxes  mischievously 


Those  who  discuss  the  General  Excise  37 

ings,i  and  queries  whether  the  object  of  relieving  the  land 
from  excessive  taxation  may  not  perhaps  be  more  conven- 
iently attained  in  another  way.^ 

A  considerable  number  of  other  writers,  who  believed  that 
the  excise  would  be  shifted  to  the  mass  of  consumers,  now 
began  to  express  their  doubts  as  to  the  beneficence  of  the 
tax  in  general.  Several  went  no  further  than  to  criticise  the 
rate  of  the  tax,  admitting  the  validity  of  the  principle  of 
the  excise,  but  desiring  necessaries  to  be  taxed  at  a  lower 
rate.  Thus  Sheridan  contends  that  "the  Excise,  if  equaly 
imposed,  were  the  best  and  easiest  of  all  taxes,"  ^  and  ad- 
vances the  usual  arguments  in  its  favor.*  But  in  discussing 
some  of  the  special  excises,  such  as  the  beer-tax,  he  main- 
tains that  they  should  have  been  levied  on  the  richer  classes, 
rather  than  on  the  workingman.^  It  is  perhaps  his  uncer- 
tainty as  to  the  real  benefits  of  the  excise  that  leads  him  to 
propose  as  a  possible,  but  novel,  substitute  a  tax  on  bache- 

do :  And  so  powerfully  doth  it  recommend,  indeed  preach  Frugality,  that,  to  say 
the  truth,  It  in  a  manner  condemns  all  Unthrifts,  as  meer  Ideots  or  Lunaticks."  — 
Ibid.,  p.  14. 

1  "Excise,  you  know,  hath  obtained  a  current  Repute  of  perfect  Equality: 
Now  I  by  no  means  admit  of  that ;  not  only  Niggards,  but  all  those  whose  Condi- 
tion obliges  them  not  to  live  Honourably  upon  their  Demeans,  at  pleasure  avoid- 
ing it." 

2  See  below,  chap.  iv. 

^  A  Discourse  of  the  Rise  and  Power  of  Parliaments,  of  Laws,  of  Courts  of 
yudicature,  of  Liberty,  Property,  and  Religion,  of  the  Interest  of  England  in 
reference  to  the  Desines  of  France,  of  Taxes,  and  of  Trade.  In  a  Letter  from  a 
Gentleman  in  the  Country  to  a  Member  in  Parliament.  [By  Thomas  Sheridan.] 
London,  1677,  chap,  xiii,  "of  Taxes."  Reprinted  as  a  separate  volume  in  Some 
Revelations  in  Irish  History  ;  or,  Old  Elements  of  Creed  and  Class  Conciliation 
in  Ireland.     Edited  by  Saxe  Bannister.     London,  1870. 

*  "  It  ought  to  be  laid  upon  all  things  ready  to  be  consum'd.  This  puts  it  into 
the  Power  of  every  man  to  pay  more  or  less,  as  he  resolves  to  live  loosely  or  thrift- 
ily ;  by  this  course  no  man  pays  but  according  to  his  Enjoyment  or  actual  Riches, 
of  which  none  can  be  said  to  have  more  than  what  he  spends  ;  tru  Riches  con- 
sisting only  in  the  use."  —  Ibid.,  p.  175  of  the  original. 

5  "  To  speak  the  truth,  in  good  Conscience,  this  Branch  ought  to  have  been 
imposed  on  the  nobles  and  estated-men  rather  than  on  the  Artificer  and 
Laborers,  who  were    very    slenderly  concern'd  in  the  grounds  of  it."  —  Ibid., 

0.  1    11    1 


38  Shifting  and  Incidence  of  Taxation 

lors.^  In  much  the  same  spirit  the  author  of  the  celebrated 
Britannia  Languens^  advocates  an  excise  primarily  on  the 
superfluities  of  the  rich,  and  maintains  that  if  excises  are 
levied  on  ordinary  necessaries  at  all  they  must  be  very  low 
ones.^  A  little  later  we  find  the  view  that  high  excises  are 
clearly  pernicious,  and  that  revenue  should  be  derived  rather 
from  "small  excises"  on  commodities  which  had  hitherto 
escaped  taxation.*  Finally,  the  growing  belief  that  high 
excises  would  ultimately  affect  the  consumer  led  some  writers 
to  advocate  particular  kinds  of  excises  for  the  precise  pur- 
pose of  diminishing  extravagant  consumption.  A  good  ex- 
ample of  this  is  the  proposal  to  tax  bricks  in  order  to  check 
the  growth  of  London  at  the  expense  of  the  rural  districts.^ 

1  "I  have  thought  of  a  sort  of  tax  which  I  believe  is  perfectly  new  to  all  the 
world.  ...  It  is  a  tax  upon  celibate,  or  upon  unmarried  people,  viz. :  that  the 
eldest  sons  of  gentlemen,  and  other  degrees  of  nobility  upwards,  and  all  other 
persons  not  married  by  the  times  limited  as  aforesaid  [from  twenty  to  twenty-five 
years  of  age],  shall  pay  per  annum  a-piece  these  following  rates,  etc.,  etc. ;  and 
all  married  men  not  cohabiting  with  their  wives  to  pay  quadruple."  —  A  Discourse 
on  the  Rise  and  Power  of  Parliaments,  pp.  177,  179. 

2  Britannia  Lattguens,  or  a  Discourse  of  Trade  :  shewing  the  Grounds  and 
Reasons  of  the  Increase  and  Decay  of  Land-Rents,  National  Wealth  and  Strength, 
etc.     London,  1680. 

*  "  But  since  I  have  now,  and  before  mentioned  Excises,  and  have  observed 
some  men  of  Parts,  almost  to  startle  at  the  naming  of  a  new  Excise,  I  shall  thus 
far  explain  and  vindicate  myself,  and  the  proposal :  First,  I  shall  agree  that  such 
Excises  as  affect  and  over-burthen  the  beneficial  parts  of  Trade,  are  of  pernicious 
Consequence.  Secondly,  that  an  Universality  of  Excise  is  both  inconvenient  and 
unnecessary;  but  that  there  may  be  Excises  Imposed  on  many  Superfluities,  and 
Excesses,  in  Meats,  Drinks,  or  Equipages,  or  upon  some  imported  Goods  Co«- 
sumed  at  home, -which  would  be  no  prejudice  to  any  kind  of  Trade;  being  no  clog 
upon  our  Exports,  or  Re-exports;  or  perhaps,  a  very  small  Excise  on  ordinary 
Meats,  Drinks,  and  Apparel,  might  be  supportable."  —  Ibid.,  p.  294. 

*  "  High  Customs  and  Excises  are  great  Obstructions  to  Trade.  .  .  .  This 
Grievance  might  be  redressed  by  moderating  the  excessive  Duties,  and  making  the 
Excises  more  universal."  The  author  therefore  proposes  "  a  new  Fund  by  small 
Excises  on  Things  which  have  not  been  yet  Taxed."  — A  Proposal  for  the  Payment 
of  the  Publick  Debts,  and  an  Account  of  some  Things  mentioned  in  Parliament 
on  that  Occasion.     London,  1714,  p.  20. 

*  "  The  Duty  on  Bricks  and  Tiles  may  give  a  seasonable  Check  to  the  wanton 
and  extravagant  Humour  of  Building,  particularly  about  this  Metropolis,  whereby 
the  Head  is  likely  to  grow  too  big  for  the  Body."  —  Animadversions  and  Obser- 


Those  who  discuss  the  General  Excise  39 

The  authors  hitherto  discussed,  holding  to  the  doctrine 
that  a  tax  on  the  producer  or  dealer  is  shifted  to  the  con- 
sumer, all  agree  that  excises  are  desirable,  although  they 
differ  somewhat  in  the  intensity  of  their  desire  for  such  a 
method  of  revenue.  But  we  now  meet  with  a  class  of  writers 
who  hold  the  same  theory  of  incidence,  while  at  the  same 
time  they  strenuously  object  to  all  excises,  precisely  because 
they  fall  on  the  consumers.  They  accept  the  doctrine  that 
excises  are  shifted  to  the  consumer,  but  they  do  not  believe 
that  the  consumer  ought  to  be  saddled  with  the  entire  load. 
We  meet  with  this  objection  to  excises  very  shortly  after  the 
inauguration  of  the  system.^ 

The  growing  opposition  is  well  reflected  in  a  Scotch  pam- 
phlet written  at  the  beginning  of  the  eighteenth  century,  in 
which  a  melancholy  picture  of  the  future  of  the  kingdom  is 
traced,  and  the  gradual  pauperization  of  the  whole  com- 
munity is  predicted.^  But  it  was  especially  at  the  time  of 
Walpole's  excise  scheme  that  this  opinion  as  to  the  perni- 

vations  upon  a  Treatise  entituled  Some  Calculations  and  Remarks  relating  to  the 
present  State  of  the  publick  Debts  and  Funds  .  .  .  by  Archibald  Hutcheson  .  .  .  to 
■which  is  added  a  New  Proposition  to  raise  Money  for  the  Use  of  the  Publick. 
Humbly  submitted  to  the  Consideration  of  both  Houses  of  Parliament,  etc.  Lon- 
don, 1 718,  p.  47.  The  author  joins  to  this  recommendation,  a  proposal  for  a  tax 
on  plate. 

^  One  of  these  early  writers  expresses  himself  very  vehemently,  as  follows: 
"That  the  Excise  of  Ale,  Beer,  Perry,  and  Syder,  and  the  charges,  affliction,  and 
troubles,  which  it  brings  upon  the  people,  which  before  our  times  of  misery, 
would  have  brought  death  and  ruine  any  private  contriver;  and  was  at  the  first 
created  by  Oliver  and  his  Impes  to  maintain  a  cursed  Rebellion,  and  set  up  a 
destroying  and  detestable  Anarchy,  may  be  abolished,  and  taken  away,  and  the 
Nation  restored  to  the  freedom  and  quiet  which  they  formerly  enjoyed  under  this 
our  ancient  and  excellently  composed  Monarchy."  —  Restauranda  :  or  the  A^eces- 
sity  of  Publick  Repairs,  by  selling  of  a  certain  and  Royal  yearly  Revenue  for  the 
King.  [By  Fabian  Philips.]  London,  1662,  p.  95.  A  still  earlier  fulmination 
was :  A  Declaration  against  the  illegal,  detestable,  oft  condemned  ne-w  Tax  and 
Extortion  of  Excise  in  general,  and  for  Flops  (a  native  uncertain  commodity)  in 
particular.     By  William  Prynne,  Esq.     London,  1654. 

2  "  Our  Merchants  are  the  first  Advancers  of  the  Taxes  that  are  upon  Trade, 
but  they  are  refounded  with  double  Interest  by  the  Noblemen  and  Gentlemen, 
who  for  the  most  part  consume  all  the  valuable  Goods  Imported. 

"Our  Peers  and  Barons,  may  easily  judge,  how  far  they  will  be  able  to  make 


40  Shifting  and  Incidence  of  Taxation 

cious  effects  of  the  excise  was  expressed  with  great  energy.'' 
Some  of  the  writers,  however,  who  were  then  quite  willing 
to  abandon  consumption  as  the  general  norm  of  taxation, 
based  their  opposition  to  excises  primarily  on  the  ground 
that  the  tax  falls  with  greater  severity  on  the  poorer  con- 
sumer, and  that  it  is  to  be  reprehended  for  this  reason. 

It  was  this  alleged  result,  together  with  the  administrative 
inquisitorial  characteristics^  that  rendered  the  excise  scheme 
so  repugnant  to  the  mass  of  the  people.  And  it  was  in  vain 
that  the  defenders  of  Walpole's  project  protested  against  the 

any  Consumpt  of  these  goods,  or  pay  what  they  get,  when  there  is  not  only  Taxes 
on  their  land,  but  on  the  Product  of  their  Land,  viz.  their  Malt,  Beer,  and  Ale. 

"Our  Burgesses  may  soon  consider,  that  when  the  Peers  and  Barons  have  no 
Money,  their  Trade  must  decay. 

"  Our  Mechanicks  will  have  no  difficulty  to  believe,  that  if  there  be  no  Trade, 
and  no  circulation  of  Money,  their  best  Trade  will  be  a  Plantation  Trade. 

"  And  in  the  last  place,  when  our  Commons  buy  such  dear  Ale,  pay  so  much 
Tax  on  Salt,  have  nothing  or  a  very  small  Price  for  the  Fruit  of  their  Labour; 
they  will  never  be  in  a  Condition  to  pay  their  Farms;  so  in  place  of  Riches,  Pov- 
erty will  soon  circulate  among  us."  —  A  Short  View  of  our  present  Trade  and 
Taxes  compared  with  what  these  Taxes  may  amount  to  after  the  Union.  With 
sotne  Reasons  why  {if  we  enter  in  an  Union,^  our  Trade  should  be  under  our 
own  Regulations.  1706,  pp.  5,  6.  The  work  is  sometimes  ascribed  to  Daniel 
De  Foe. 

1  Cf.  the  following  passage :  "  Excises  first  got  a  footing  amongst  us  in  the 
Civil  Wars,  which  was  a  time  of  universal  confusion ;  and  they  were  then  so 
odious  that  each  party  branded  the  other  with  being  the  Authors  thereof;  but 
before  that  they  were  so  much  dreaded  that  a  Member  of  Parliament  was  very 
near  being  sent  to  the  Tower  for  only  mentioning  their  name  in  the  House,  tho' 
with  no  evil  design :  What  then  would  they  have  done  to  the  Man,  who  should 
have  proposed  multiplying  them,  when  the  Nation  groaned  under  the  Burthen  of 
so  many,  as  we  do  already."  —  A  Word  to  the  Freeholders  and  Burgesses  of  Great 
Britain,  being  Seasonable  and  serious  Remarks  upon  the  inconsistent  Conduct  of 
certain  Boroughs,  in  sending  instructions  to  their  Representatives  to  oppose  the 
Excise  Bill,  and  yet  re-electing  them  after  their  being  rewarded  with  Places  for 
voting  for  the  same.     London,  1733,  p.  31. 

2  This  side  of  the  tax  is  well  illustrated  in  the  following  vigorous  extract  from  a 
contemporary  pamphlet :  "  Why  really  I  can't  help  thinking,  that  for  a  free-born 
Englishman  to  have  his  Warehouse,  Shop,  and  House,  even  to  his  Wife's  Bed- 
chamber, visited,  and  rummaged,  at  all  Hours  of  the  Day  or  Night,  by  every  pert 
Radical  that  shall  think  it  worth  his  While  to  be  troublesome,  at  the  same  time 
that  the  Fellow,  strip  him  of  his  Salary,  shall  not  be  worth  a  Groat ;  nor,  perhaps, 
would  not  be  trusted  in  an  honest  House,  is  an  Inconvenience,  to  whom  even 


Those  who  discuss  the  General  Excise  41 

identification  of  his  scheme  with  the  hated  excise.^  Some  of 
the  writers  also  added  the  further  objection  that  the  excise 
sins  against  the  doctrine  of  equahty  because  of  its  failure 
adequately  to  distinguish  between  the  various  quantities  of 
the  article  consumed.^  In  the  main,  however,  it  was  the 
argument  of  the  unequal  pressure  of  the  excise  upon  the  poor 
which  won  the  day. 

One  of  the  earliest  authors  to  show  this  defect  in  the 
excise  is  Gary.  He  starts  out  with  the  general  proposition 
that  the  tax  system  must  be  so  contrived  "that  the  Poor  bear 
little  or  none  of  the  Burthen,  their  Province  being  more  prop- 
erly to  labour  and  fight  than  pay."  "^  Not  only  does  a  man 
who  works  for  his  income  part  with  it  with  reluctance,  says  he, 
but  the  revenue  accruing  to  the  government  from  these  small 

the  Gentleman  who  treats  it  so  mildly  would  not  care  to  be  subject :  In  plain  Eng- 
lish, 'tis  a  damnable  Hardship,  such  a  Hardship  that  the  Christians,  who  are 
born  subjects  to  the  Great  Turk,  and  are  look'd  upon  by  the  Mahometans  as 
little  better  than  Dogs,  are  not  exposed  to  the  like." —  l^he  Vintner  and  Tobac- 
conists Advocate,  being  Remarks  upon,  and  a  Full  Ans'cver  to  those  Scandalous 
Papers  published  in  The  Daily  Courant,  under  the  title  of  The  Occasional  Finan- 
cier, and  under  the  Names  of  Carus  and  Meanwell.     London,  1733,  p.  26. 

^  Thus  one  writer  indignantly  repudiates  the  assertion  that  any  general  excise 
is  involved,  qualifying  the  statement  as  "  an  insinuation,  so  extravagant  a  calumny, 
so  notorious  a  work  of  egregious  ignorance,  so  infamous  a  consequence  of 
slanderous  injustice  and  so  palpable  an  attempt  to  poison  the  minds  of  the  people," 
that  it  is  nothing  more  than  "the  coinage  of  daily  propagators  of  clamour."  —  The 
Reply  of  a  Member  of  Parliament  to  the  Mayor  of  his  Corporation.  London, 
1733,  p.  20.  A  similar  attitude  is  taken  in  An  Impartial  Enquiry  into  the 
Present  Question  concerning  Excise,  in  which  the  advantages  arising  to  the  King 
and  Subject  from  raising  Duties  by  Excise  are  demonstrated  and  the  Objections 
thereto  obviated.  London,  1 733.  See  also  The  Economic  Policy  cf  Robert  Wal- 
pole,  by  N.  A.  Brisco,  New  York,  1907,  esp.  pp.  123  et  seq. 

2  This  criticism  can  be  best  illustrated  by  a  later  author,  who  said :  "  This 
Accuracy,  this  Justness  of  Proportion,  this  Equality  —  a  general  Excise  upon 
Consumption  will  never  obtain  it.  For  in  that  Case,  those  who  intlulge  themselves 
in  the  best  Sorts  and  those  who  are  confined  by  their  Circumstances  to  the  most 
ordinary,  would  each  of  them  pay  the  same  Tax."  —  An  Address  to  such  of  the 
Ejectors  of  Great  Britain  as  are  not  makers  of  Cyder  and  Perry.  By  the  Repre- 
sentative of  a  Cyder-County.     London,  1763,  p.  15. 

^  An  Essay  on  the  State  of  England  in  relation  to  its  Trade,  its  Poor  and  its 
Taxes,  for  carrying  on  the  present  IVar  against  France.  By  John  Gary,  Mer- 
chant in  Bristoll.     BristoU,  1695,  p.  173. 


42  Ski/ling  and  Incidence  of  Taxation 

payments  will  after  all  be  insignificant.^  The  vital  objection 
to  the  excise,  however,  is  its  inequality ;  for  although  the  rich 
man  consumes  more  than  the  poor  man,  the  tax  is  paid  in  the 
one  case  out  of  the  surplus  over  and  above  all  needful  expendi- 
ture, but  in  the  other  case  out  of  a  fund  which  barely  suffices 
for  the  necessaries  of  life.^ 

This  view,  which  closely  approaches  the  one  held  by  mod- 
ern democracies,  was  occasionally  emphasized  in  the  following 
decades.  One  vigorous  writer,  early  in  the  eighteenth  cen- 
tury, objects  to  "  those  cruel  and  unequal  Taxes,  which  pinch 
and  afflict  those  People  chiefly  who  are  least  able  to  support 
Taxes." ^  He  advances  what  he  calls  a  "true,  tho'  perhaps 
not  a  regularly  determin'd  Observation " ;  namely,  "  when 
Land  is  Tax'd,  the  Rich  pay  more  than  the  Poor ;  but  when 
the  Product  of  Land  is  tax'd,  the  Poor  pay  more  than  the 
Rich."  He  proceeds  to  show  that  "the  Rich  pay  for  their 
Land  because  they  have  it ;  the  Poor  pay  for  their  daily 
Necessaries,  because  they  have  them  not."*  Owing  to  his 
belief  that  taxes  on  commodities  are  relatively  more  burden- 
some to  the  poor,  he  favors  the  land  tax,^  together  with  a  tax 
on  funds.^ 

1  "  He  that  gets  his  Money  by  the  Sweat  of  his  Brow  parts  not  from  it  with- 
out much  Remorse  and  Discontent,  and  when  all  is  done,  'tis  but  a  little  they  pay, 
therefore  Taxes  that  light  heavy  on  them  (such  as  Chimney-Money,  and  often- 
times a  Poll)  tend  rather  to  unhinge  than  assist  the  Government,  by  disgusting 
such  a  number  of  robust  and  hardy  men  as  carry  a  great  personal  Ballance  in  the 
Kingdom." — Ibid.,  p.  174. 

2  "  A  general  Excise  cannot  do  well,  for  besides  the  great  Charge  and  Oppres- 
sion of  Officers,  it  shews  no  Respect  to  the  Poor,  but  they  pay  more  than  the 
Wealthiest  of  their  Neighbours  suitable  to  what  they  have ;  for  though  a  rich  Man 
spends  more  in  excisable  things  than  a  poor  Man  doth,  yet  it  is  not  his  All,  whereas 
the  other's  Poverty  gives  him  leave  to  lay  up  nothing,  but  'tis  as  much  as  he  can  do 
to  provide  Necessaries  for  his  Family,  out  of  all  which  he  pays  his  Proportion." 
—  Ibid.,  p.  1 74. 

3  Fair  Payment  no  Spunge :  or,  Some  Considerations  on  the  Unreasonableness 
of  Refusing  to  Receive  back  Money  lent  on  Publick  Securities.  And  the  Necessity 
of  Setting  the  Nation  Free  from  the  Insupportable  Burthen  of  Debt  and  Taxes. 
London,  1717.     Chap,  ix,  "Of  Equality  of  Taxes,"  p.  60. 

4  Ibid.,  p.  61. 
fi  Ibid.,  p.  67. 

«  Ibid.,  chap,  x,  "Of  Inequalities  in  Taxings,"  p.  71. 


Those  who  discuss  the  General  Excise  43 

This  view  as  to  the  incidence  of  the  excise  was,  however, 
in  some  danger  of  being  neglected,  when,  toward  the  middle 
of  the  eighteenth  century,  it  was  again  put  forward  by  two 
writers  with  such  force  that  it  left  its  indelible  imprint  on 
general  thought.  One  of  these  authors  goes  so  far  as  to 
break  entirely  with  the  old  theory  of  the  basis  of  taxation, 
and  to  lay  down  the  principle  that  taxes  should  be  levied 
according  to  property  and  not  according  to  consumption. 
The  excise,  says  he,  sins  against  this  cardinal  rule,  and  is 
therefore  convicted  of  inequality.^  But  even  regarded  as  a 
tax  on  property  —  that  is,  on  commodities  —  the  excise  is 
thoroughly  unequal ;  for  not  only  the  tax,  but  a  great  deal 
over  and  above  the  tax,  will  be  shifted  to  the  consumer,  and 
will  hit  the  poor  man  on  his  necessaries.^  Our  author  is, 
however,  so  far  carried  away  by  his  ardor  to  show  the  evils 
of  the  excise  as  to  intimate  that  wages  must  rise  with  the 
increased  price  of  necessaries,  and  that  therefore  the  whole 
community  will  suffer  in  the  end.^  Were  it  not  that  he  puts 
his  emphasis  on  the  first  point  —  the  burden  on  the  poor, — 
rather  than  on  the  second  —  the  burden  on  the  general  com- 
munity—  he  ought  rather  to  be  included  with  writers  like 
Mun  and  Fauquier.* 

^  "  Excises,  as  they  are  of  all  Impositions  the  most  injurious  to  Liberty,  so  they 
are  the  most  unequal  in  their  Nature,  and  fall  the  most  heavily  on  Property,  . .  . 
They  are  the  most  unequal,  because  Taxes  should  be  measur'd  by  Property.  .  .  . 
But  Excises  measure  by  the  Quantity  of  a  Commodity  consum'd :  Whence  the 
Contribution  of  a  poor  Man  with  a  large  Family,  may  exceed  Those  of  a  rich 
Batchelor  of  a  hundred  Times  his  Fortune."  —  An  Appeal  to  the  Public,  in  rela- 
tion to  the  Tobacco  *  *  *  and  a  Revival  of  the  old  Project,  to  establish  a  General 
Excise.     London,  1751,  p.  51. 

"^  "They  fall  most  heavily  on  Property,  more  especially  when  impos'd  on 
Necessaries,  or  on  Commodities  render'd  by  Habit  necessary,  because  they  accum- 
ulate as  they  go;  because  he  that  issues  the  Tax  first,  will  be  paid  for  the  dis- 
bursement and  also  for  the  extraordinary  Difficulties,  Hardships,  and  Visitations 
brought  upon  him  by  them." — Ibid.,  p.  52. 

'  "  Because  the  Price  of  Labour  rises  with  the  Price  of  the  Commodities  con- 
sum'd by  the  Labourer :  and  because  the  Dearness  of  Labour  affects  the  whole 
Circle  of  our  Commerce,  both  Domestic  and  Foreign.  .  .  .  This  is  sufficient  to 
shew,  that  tho'  the  Trader  is  the  first  Person  pinch'd  on  these  Occasions,  the  Evil 
is  progressive,  and  at  last  both  fastens  and  preys  on  the  whole  Community."  — 
Ibid.,  pp.  52,  53.  *  See  above,  pp.  26  to  30. 


44  Shifting  and  Incidence  of  Taxation 

The  charge  of  inconsistency  can,  however,  not  be  brought 
against  Nickolls  or  Dangeul,  the  other  writer  to  show  the  in- 
equality of  general  taxes  on  consumption.  Dangeul  firmly 
held  to  the  opinion  that  when  taxes  reached  the  consumers 
they  stayed  there. ^  Taxes  on  consumption,  in  his  opinion, 
are  thoroughly  unjust,  because  they  are  out  of  all  proportion 
to  the  relative  abilities  of  the  taxpayers ;  for  abilities  are 
measured  by  property  and  not  by  consumption.^ 

The  opposition  to  the  excise  was  also  strengthened  by 
those  who  not  only  pointed  out  that  high  taxes  would  cause 
serious  damage  to  the  consumer  by  compelling  him  to  dimin- 
ish his  consumption,  but  also  showed  that  this  would  involve 
a  serious  loss  of  revenue  to  the  government.  The  poini  that 
was  subsequently  so  well  put  by  Dean  Swift,  that  in  the 
arithmetic  of  the  customs  two  and  two  do  not  always  make 
four,  was  already  emphasized  during  the  excise  controversy, 
and  was  declared  equally  applicable  to  internal  duties.^ 

^  Remarks  on  the  Advantages  and  Disadvantages  of  France  and  of  Great- 
Britain  with  Respect  to  Commerce,  and  to  the  other  Means  of  Increasing  the 
Wealth  and  Power  of  a  State.  Being  a  {pretended^  Translation  from  the  Eng- 
lish, written  by  Sir  John  Nickolls  and  printed  at  Ley  den  17^4.  Translated  out 
of  the  French  Original,  1754.      [Really  by  Dangeul,  Marquis  de  Plumart.] 

2  "That  these  taxes  incurr  the  objection  of  being  unequal,  and  unjust,  in  that, 
for  the  portion  of  things  absolutely  necessary  to  life,  the  poor  and  the  rich  pay  the 
same  sum :  insomuch  that  whereas  the  people  being  supposed  divided  into  two 
parts  pretty  near  equal,  of  which  the  one  has  only  its  industry  to  live  upon,  the 
other  possesses  riches,  enjoys,  and  pays  the  labor  of  the  other :  these  two  halves, 
so  different  in  their  abilities,  share  nevertheless  equally  the  weight  of  these  taxes 
upon  all  the  commodities,  or  rather  necessaries,  of  which  the  consumption  admits 
of  little  or  no  abuse  or  luxury.  The  contribution  is  light,  for  the  batchelors  or 
single  persons,  in  easy  and  idle  circumstances :  but  is  excessive  for  those  useful! 
subjects,  of  whom  the  families  are  numerous,  and  the  fortunes  narrow."  —  Ibid., 
p.  260.     For  his  practical  propositions,  see  below,  p.  58. 

8  "This  is  a  Truth  which  will,  I  believe,  be  acknowledged  by  all  Traders  in 
general,  it  being  universally  known  that  the  greater  Duty  any  Commodity  pays,  the 
less  of  it  ten-fold  is  consumed;  consequently  if  the  King  has  two  Pence  in  the 
Pound  for  any  Merchandize,  that  before  paid  but  one  Penny,  not  above  a  tenth 
Part  of  that  Merchandize  will  be  consumed,  and  consequently  not  above  a  tenth 
Part  imported;  so  that  upon  the  Ballance  the  Crown  will  be  a  Loser  eight  Parts 
in  ten," —  The  Norfolk  Scheme :  or  a  Letter  to  William  Pulteney,  Esq. ;  on  the 
Present  Posture  of  Affairs,  particularly  with  Relation  to  the  Scheme  for  altering 


Those  who  discuss  the  General  Excise  45 

One  of  the  most  ingenious  arguments  in  opposition  to  the 
excise  on  the  score  of  its  wider  effects  and  incidental  results 
is  found  in  the  somewhat  later  work  of  Brooks,  who  repre- 
sented the  barbers  and  wigmakers  in  their  attempts  to  rid 
themselves  of  the  duty  on  starch.^  After  quoting  with  ap- 
proval a  memorial  of  the  starch-makers  to  the  effect  that  a 
decrease  of  the  tax  would  augment  the  revenue,^  and  after 
alluding  to  the  frauds  committed  by  the  "  Makers  of  sophis- 
ticated Hair  Powder,"  ^  Brooks  calls  attention  especially  to  two 
commonly  neglected  consequences  of  the  tax.  What  is  left 
in  the  meal  after  extracting  the  starch  becomes  an  excellent 
"  Hog-feed."  It  is  notorious,  says  Brooks,  that  the  "  Bacon 
and  Pork  of  the  Starch  Makers'  Feed  affords  the  best  of 
Price."  The  high  duty  on  starch  has  so  diminished  the  con- 
sumption that  it  has  seriously  deteriorated  the  quality  of  pork, 
and  has  interfered  with  this  trade  to  the  colonies  and  planta- 
tions.* A  still  weightier  argument  however  to  Brooks  is  one 
that  came  to  him  as  an  afterthought.  It  is  well  known,  says 
Brooks,  that  when  the  army  under  Marlborough  was  dressed 
"  with  the  best  of  Powder,  made  of  the  finest  Wheat-Starch  " 
this  "bestowed  such  a  Gaiety  and  Politeness  to  the  Appear- 
ance of  a  young  soldier,  as  drew  more  Recruits  to  the  Dnnn- 

the  Method  of  Collecting  the  Revenues,  by  converting  the  Customs  into  Excises,  etc. 
London,  1733,  p.  27. 

^  England^ s  Interest :  or  Eree  Thoughts  on  the  Starch  Duty.  IVherein  is  set 
forth  the  Advantages  that  will  attend  the  Earmers  and  Landholders  ;  and  also  some 
Observations  relating  to  the  Powder,  and  the  Hardships  and  Inconvenience  that  the 
Barbers  and  Peruke-makers  are  subjected  to  thereby.  Together  with  a  Recital  of 
what  will  be  laid  before  the  Parliament.  Also  an  Address  to  his  Royal  Highness 
the  Duke  of  Cumberland,  relating  to  the  Army.  To  which  is  added  a  f  etter  to  a 
Member  of  the  Honourable  House  of  Commons.  Dedicated  to  the  Hon.  Henry 
Pelham,  Esq.,  Eirst  lord  Commissioner  of  his  Majesty s  Treasury.  By  John 
Brooks.  London,  1752.  Similar  ideas  may  be  found  in  Brooks'  earlier  work 
A  short  Treatise  for  reducing  the  Duty  on  Starch,  London,  1 75 1. 

"^  "  Your  Memoralists  most  humbly  offer  it  as  their  opinion  that  the  lowering 
the  said  Duties  will  necessarily  promote  the  Consumption  of  the  Starch,  so  as  to 
increase  this  Branch  of  the  Revenue  considerably  beyond  its  present  Produce." 
—  England's  Interest,  p.  19. 

'  Op.  cit.,  preface,  p.  iv,  and  pp.  30-31. 

*  Op.  cit.,  pp.  32-33. 


46  Shifting  and  Incidence  of  Taxation 

head  than  all  the  prevailing  arguments  of  the  officer  could 
do." 

The  chief  controversy  as  to  the  advisability  of  the  excise 
turned,  however,  on  the  question  of  its  influence  on  the 
laborer,  and  more  especially  of  its  effect  on  the  cost  of  labor. 
Mun  and  his  followers,  it  will  be  remembered,  maintained 
that,  so  far  as  taxes  on  consumption  were  taxes  on  the  neces- 
saries of  life  of  the  laborers,  they  would  be  shifted  to  the 
employers.  Petty  and  his  school,  on  the  other  hand,  held 
that  the  excise  on  necessaries  of  Hfe  would  rest  on  the  work- 
man. But  while  these  latter  writers  agreed  on  the  theory 
of  incidence,  they  drew  different  conclusions  according  to 
their  belief  in  the  efficacy  of  high  or  of  low  wages.  Most  of 
the  writers  of  the  close  of  the  seventeenth  and  the  first  half 
of  the  eighteenth  century  imagined  that  taxes  on  the  neces- 
saries of  life  would  constitute  a  great  stimulus  toward  an  im- 
provement in  the  condition  of  the  laborer,  in  sobriety,  care- 
fulness and  efficiency.  A  tax  on  labor  would  thus,  they 
thought,  be  a  real  spur  to  industry  and  commerce,  and  a 
benefit  to  the  community  in  general;  for  low  wages  mean 
low  cost  of  production.  When  the  necessaries  of  life  are 
taxed,  runs  the  argument,  not  only  will  the  laborer  have  to 
work  harder  and  longer  to  maintain  himself,  —  which  will  be 
a  benefit  to  him,  — but,  on  the  other  hand,  there  will  be  a  re- 
duction in  the  labor-cost  to  the  employer,  which  will  be  an 
advantage  to  the  community.  It  was  only  very  slowly  that 
this  belief  in  the  efficacy  of  low  wages  was  replaced  by  what 
we  are  to-day  accustomed  to  call  the  theory  of  the  economy  of 
high  wages.  With  it  came  a  corresponding  distrust  of  the  policy 
of  taxes  on  the  necessaries  of  life.  But  both  the  advocates  and 
opponents  of  the  excise  from  this  point  of  view  based  their 
practical  conclusions  on  the  same  theory  of  incidence ;  namely, 
that  a  tax  on  necessaries  would  rest  on  the  laborer.^ 

1 A  mention  of  a  few  of  the  writers  discussed  in  the  following  pages  may  be 
found  in  Schulze-Gavernitz,  Der  Grossbetrieb,  1892,  pp.  2-10,  recently  translated 
by  O.  S.  Hall,  under  the  title  of  The  Cotton  Trade  in  England  and  on  the 
Continent.     London,  1895.     But  he  does  not  treat  them  at  all  from  the  fiscal 


Those  who  discuss  the  G enteral  Excise  47 

The  earliest  trace  of  the  doctrine  that  high  wages  are  bad 
not  only  for  the  laborer  but  also  for  the  community  is  found 
in  a  work  of  Thomas  Manley.  He  points  out  that  high  wages 
are  the  principal  cause  of  England's  inability  to  compete  with 
Holland  in  the  production  of  manufactures.  At  the  same 
time,  he  contends,  high  wages  do  the  laborer  no  good,  because 
not  only  do  "the  men  have  just  as  much  the  more  to  spend 
in  tipple,  and  remain  now  poorer  than  when  their  wages  was 
less,"  but  "  they  work  so  much  the  fewer  days  by  how  much 
the  more  they  exact  in  their  wages."  ^  Another  writer  shortly 
after  expresses  very  much  the  same  view  as  to  the  "  mischiev- 
ousness  "  of  high  wages,^  and  suggests  that  an  endeavor  be 
made  "  to  reduce  the  wages  of  our  Manufacturers  to  a  more 
sober  and  less  expensive  way  of  living." 

Neither  Manley  nor  his  anonymous  follov/er  proposed  the 
specific  expedient  of  a  tax  on  wages.  Manley  contented  him- 
self with  stating  in  general  terms  that  the  chief  concern  of 
England  was  to  "subdue  our  wages  ";  ^  and  the  anonymous 
writer  recommended  a  rather  drastic  but  indirect  method  to 
reduce  wages.*      But  the  theory,  when  once  put  forth,  could 

point  of  view.     Cf.  also  the  few  words  in  Brentano,  Das  Verhaltniss  von  Arbeits- 
lohn  und  Arbeitszeit  zur  Arbeitsleistung,  1875;    2d  ed.,  1893,  p.  57. 

1  Usury  at  Six  per  Cent,  examined,  and  Found  unjustly  charged  by  Sir  Tho, 
Culpeper  and  J.  C.  with  many  Crimes  and  Oppressions,  whereof  'tis  altogether 
innocent.  Wherein  is  shewed  the  necessity  of  retrenching  our  Luxury  and  vain 
consumption  of  Forraign  Commodities,  imported  by  English  Money  :  also  the  reduc- 
ing the  Wages  of  Servants,  Labourers,  and  Workmen  of  all  sorts,  which  raiseth 
the  value  of  our  Manufactures,  ij  or  20  per  Cent,  dearer  than  our  Neighbours  do 
afford  them,  by  reason  of  their  cheap  Wages,  etc.  By  Thomas  Manley,  Gent.  Lon- 
don, 1669,  p.  19. 

2  "  Handicraft  Tradesmens  high  wages,  which  they  exact  for  their  work,  is 
greatly  mischievous,  not  only  to  every  man  who  hath  occasion  to  use  them  .  .  . 
but  it  is  destructive  to  Trade,  and  hinders  the  consumption  of  our  Manufactures  by 
Foreigners." —  The  Grand  Concern  of  England  explained ;  in  several  Proposals 
offered  to  the  Consideration  of  the  Parliament.  By  a  Lover  of  his  Countrey  and 
Well-wisher  to  the  Prosperity  both  of  the  King  and  Kingdoms.  London,  1673,  p.  54. 

8  Usury  at  Six  per  Cent.,  p.  22. 

*  His  plan  is  "to  enjoyn  all  English  men  not  to  wear  anything  but  what  is  of 
our  own  Growth  and  Manufacturies;  which  will  encrease  a  Consumption  at  home, 
and  set  those  at  work  who  now  live  idle,  and  by  giving  them  full  work,  would 
bring  down  their  wages." —  The  Grand  Concern,  p.  55. 


a8  Shifting  and  Incidence  of  Taxation 

not  fail  to  draw  attention  to  its  obvious  corollary.  The  de- 
mand for  the  use  of  the  power  of  taxation  as  an  instrumen- 
tality of  social  reform  and  the  regulation  of  labor  soon  made 
its  appearance  —  for  the  first  time,  perhaps  —  in  the  work  of 
John  Houghton. 1 

In  the  heading  of  the  chapter  devoted  to  this  subject, 
Houghton  lays  down  the  principle  "  that  this  Kingdom  will 
thrive  more,  and  the  Manufactors  live  better,  and  sell  their 
Manufactures  Cheaper  when  Provisions  are  Dear,  than 
when  Cheap."  ^  His  major  premise  is  that  "if  there  be  of 
Food  a  Plenty,  Laziness  follows  it."  ^  When  the  workmen 
get  high  wages,  they  stop  work  and  spend  their  earnings  in 
debauchery.  The  ordinary  laborer  in  England  earns  enough 
in  three  or  four  days'  labor  to  support  him  the  entire  week.* 
If  he  had  to  pay  more  for  his  provisions,  he  would  work 
harder  and  produce  more.^  Thus  dearness  would,  in  the 
end,  bring  about  industry  and  plenty.  Houghton  therefore 
proposes,  in  order  to  maintain  this  artificial  dearness,  not 
only  an  export  bounty  on  corn,  but  an  increase  of  the  excise 
on  beer,  ale  and  spirits,  as  well  as  the  imposition  of  an 
"Excise  of  a  groat  a  pound  on  Wool."^  The  effect  of  this 
will  be,  he  thinks,  that  the  "  meaner  sort  of  People  will  not 

1  A  Collection  of  Letters  for  the  Improvement  of  Husbandry  and  Trade.  By 
John  Houghton,  Fellow  of  the  Royal  Society.  London,  1681.  The  passages 
quoted  are  found  in  the  second  volume,  London,  1683. 

2  Ibid.,  p,  1 74. 
'  Ibid..,  p.  175. 

*  "  When  the  Frame-work  Knitters,  or  Makers  of  Silk-Stockings  had  a  great 
Price  for  their  Work,  they  have  been  observed  seldom  to  work  on  Mundays  and 
Tuesdays,  but  to  spend  most  of  that  time  at  the  Ale-House  and  Nine-Pins.  .  .  . 
The  Weavers,  'tis  common  with  them  to  be  drunk  on  Munday,  to  have  their 
Heads  ach  on  Tuesday,  and  their  Tools  out  of  order  on  Wednesday.  As  for  the 
Shoemakers,  they'l  rather  be  hang'd  than  not  remember  St.  Crispin  on  Munday  ; 
and  it  commonly  holds  as  long  as  they  have  a  penny  of  Money  or  pennyworth  of 
Credit." — Ibid. -p-  177.  His  account  of  "most  other  Professions  that  live  by 
Labour  "  is  equally  delectable. 

^  "  If  by  the  Dearness  aforesaid  the  Manufactors  cannot  keep  up  their  habitual 
Port  by  working  three  days  in  a  Week,  they  will  work  four  days,  or  find  out 
Engines  or  new  Contrivances  equivalent."  —  Ibid.,  p.  181. 

6  Ibid.,  p.  183. 


Those  who  discuss  the  General  Excise  49 

be  diverted  from  better  Imployments  "  ;  but  that  "this  part 
of  their  Provision  will  be  dearer  to  them,  and  will  oblige  them 
to  more  Industry,  whereby  they  will  procure  more  Manufac- 
ture to  sell  cheaper."  ^ 

Petty  himself,  whose  general  theory  on  the  incidence  of  taxa- 
tion has  already  been  explained,^  in  a  subsequent  treatise  ex- 
pressed views  in  substantial  agreement  with  those  of  Hough- 
ton. He  significantly  heads  the  chapter  in  question  "That 
some  kind  of  Taxes  and  Publick  Levies  may  rather  increase 
than  diminish  the  Wealth  of  the  Kingdom."^  He  maintains 
that  when  the  price  of  food  is  low,  laborers  can  scarcely  be 
procured  at  all,*  and  he  accordingly  recommends  as  extremely 
desirable  a  tax  on  the  necessaries  of  life.^ 

The  belief  that  an  increased  cost  of  living  would  be  an 
incentive  to  industry  is  found  in  many  of  the  writers  of  this 
period.  Not  all,  however,  desire  to  secure  this  artificial  dear- 
ness  through  the  medium  of  taxation.  Thus,  Sir  William 
Temple  thought  that  the  troubles  of  Ireland  could  easily  be 
remedied  by  "  an  Increase  of  People  in  the  Country  to  such 
a  degree  as  may  make  things  necessary  to  Life  dear,  and 
thereby  force  general  industry  from  each  Member  of  a 
Family  (Women  as  well  as  Men)."  ^  In  the  same  way  another 
writer,  soon  after,  sought  to  prove  that  "  Labour  is  always 
dearest  when  Provisions  are  cheapest,""  and  that  an  increase 

1  A  Collection  of  Letters  for  the  Improvement  of  Husbandry  and  Trade, 
p.  184. 

*  Above,  p.  30. 

8  Political  Arithtnetick.     By  Sir  William  Petty.     London,  1690,  chap.  ii. 

*  "  It  is  observed  by  Clothiers  and  others,  who  employ  great  numbers  of  poor 
people,  that  when  Corn  is  extremely  plentiful,  that  the  Labour  of  the  poor  is  pro- 
portionably  dear :  And  scarce  to  be  had  at  all  (so  licentious  are  they  who  laliour 
only  to  eat,  or  rather  to  drink)."  —  Ibid.,  p.  45. 

*  Petty  joins  to  this  the  further  recommendation  that  in  times  of  plenty  the 
surplus  food  be  sent  to  "  publick  Store-houses." 

"  An  Essay  upon  the  Advancement  of  Trade  in  Ireland.  By  Sir  William 
Temple.     Published  in  his  Miscellanea,  ed.  1693,  part  i,  p.  116. 

''  Some  Thoughts  on  the  Interest  of  Money  in  General,  and  particularly  in  the 
Publick  Funds.  With  Reasons  for  fixing  the  same  at  a  lower  Rate,  ~vith  Regard 
especially  to  the  Landholders.  London,  n.d.  (published  between  1728  and  1740). 
His  argument  is  that  "  People  in  low  Life,  who  work  only  for  their  daily  Bread,  ii 


50  Shifting  and  Incidence  of  Taxation 

in  the  price  of  necessaries  will  not  injure  the  laborer,  or  in- 
crease the  cost  to  the  producer. 

The  general  doctrine  that  taxes  really  conduce  to  thrift 
was,  however,  made  more  or  less  popular  in  England  toward 
the  end  of  the  seventeenth  century,  by  appeals  to  the  experi- 
ence of  England's  great  rival, — the  Low  Countries.  Not 
only  did  authors,  like  Temple,^  continually  call  attention  to 
the  Dutch,  but  ample  testimony  to  the  great  benefits  supposed 
to  result  from  the  excise  was  found  in  the  works  of  the  Dutch 
writers  themselves,  whose  ideas  were  made  accessible  to  the 
English  public  through  translation.  Thus,  the  author  of  the 
celebrated  Political  Maxims,  who  was  always,  but  erroneously,^ 
supposed  in  England  to  have  been  the  renowned  Dutch 
statesman,  John  De  Witt,  advocates  the  imposition  of  excises 
on  the  laborers,  because  "  it  is  evident  that  all  the  said  ways 
for  raising  of  Mony  will  excite  the  Commonalty  to  Ingenuity, 
Diligence  and  Frugality."^ 

This  doctrine  of  the  value  of  low  wages  continued  far  into 
the  eighteenth  century.  One  of  its  prominent  advocates 
toward  the  middle  of  the  century  was  the  celebrated  Josiah 

they  can  get  it  by  three  Days  Work  in  a  Week,  will  many  of  them  make  Holiday 
the  other  three,  or  set  their  own  Price  on  their  Labour,"  p.  73. 

1  The  following  passage  from  Temple  was  much  talked  about :  "  The  chief 
Fonds  out  of  which  this  (Revenue)  rises  is  the  Excise  and  the  Customs:  The  first 
is  great  and  so  general,  that  I  have  heard  it  observ'd  at  Amsterdam,  that  when  in 
a  Tavern,  a  certain  Dish  of  Fish  is  eaten  with  the  usual  Sauce,  above  thirty  several 
Excises  are  paid,  for  what  is  necessary  to  that  small  service." —  Observations  upon 
the  United  Provinces  of  the  Netherlands.  By  Sir  William  Temple,  London,  1673, 
p.  226;  reprinted  in  The  Works  of  Sir  William  Temple,  Bart.  London,  1720, 
i,  pp.  70,  71. 

^  The  True  Interest  and  Political  Alaxims  of  the  Republick  of  Holland  and 
West  Friesland.  Written  by  John  De  Witt  and  other  great  Men  in  Holland. 
London,  1702.  The  original  Dutch  edition  was  published  anonymously  in  1662. 
The  real  author  was  Pieter  De  la  Court.  De  Witt  did  indeed  write  one  or  two 
chapters,  but  not  the  ones  in  question.  We  now  know  precisely  what  he  did 
write.  Cf  Laspeyres,  Geschichte  der  volkswirthschafllichen  Anschauungen  der 
Niederlander  und  ihrer  Literatur  zur  Zeit  der  Republik.     1863,  pp.  18,  19. 

'^  The  True  Interest,  p.  109.  In  An  Essay  on  Trade  and  Commerce,  mentioned 
below,  p.  53,  note  2,  the  maxim  is  quoted  on  p.  49  in  a  little  different  language,  and 
ascribed  to  De  Witt.  The  erroneous  ascription  is  also  followed  in  Arthur  Young, 
The  Farmer'' s  Letters,  p.  29,  and  in  Schulze-Gavernitz,  Der  Grossbetrieb,  p.  3. 


Those  who  discuss  the  General  Excise  51 

Tucker.  Tucker  turns  his  attention  to  "  the  lower  Class  of 
People  "  and  holds  that  if  they  "  arc  subject  to  little  or  no  Con- 
troll,  they  will  run  into  Vice :  Vice  is  attended  with  Expence, 
which  must  be  supported  either  by  an  high  Price  for  their 
Labour,  or  by  Methods  still  more  destructive."  ^  In  England 
"  the  men  are  as  bad  as  can  be  described :  who  become  more 
vitious,  more  indigent  and  idle,  in  proportion  to  the  advance 
of  Wages  and  the  Cheapness  of  Provisions."  ^  Tucker  then 
proceeds  to  discuss  the  plan  of  a  "  certain  very  ingenious 
Gentleman,  and  himself  a  great  Manufacturer  in  the  Cloth- 
ing Way  "  to  impose  a  special  tax  on  the  necessaries  of  life. 
This  gentleman  had  observed  "  that  in  exceeding  dear  Years 
when  Corn  and  Provisions  are  at  an  extravagant  Price,  then 
the  Work  is  best  and  cheapest  done:  —  but  that  in  cheap 
Years,  the  Manufacturers  are  idle.  Wages  high,  and  Work  ill 
done."  "Therefore,"  adds  Tucker,  "he  infers,  that  the  high 
Duties,  Taxes  and  Excises  upon  the  Necessaries  of  Life  are 
so  far  from  being  a  Disadvantage  to  Trade  .  .  .  that  they 
are  eventually  the  chief  Support  of  it :  —  and  ought  to  be 
higher  still,  in  order  to  oblige  the  Poor  either  to  Work  or 
Starve."  ^ 

Tucker  observes  that  "  Some  Things  may  certainly  be  said 
in  favour  of  this  Scheme."  But  on  mature  reflection  he  is, 
as  "  an  humane  and  compassionate  man,"  a  little  doubtful 
about  it,*  and  thinks  that  his  alternative  plans  of  encourag- 
ing immigration  ^  and  of  raising  the  pecuniary  limit  of  the 
elective  franchise  ^  may  produce  the  same  results  and  "  keep 

^  A  Brief  Essay  on  the  Advantages  and  Disadvantages  which  respectively 
attend  France  and  Great  Britain,  with  Regard  to  Trade,  etc.  By  Josiah  Tucker. 
2d  ed.,  London,  1750,  p.  36.  The  third  edition  of  1753  is  reprinted  in  Lord 
Overstone's  Select  Collection  of  Scarce  and  Valuable  Tracts  on  Commerce,  1859. 

"^  Ibid.,  p.  37. 

8  Ibid.,  p.  54. 

*  He  even  speaks  of  it  as  "a  very  singular  scheme." 

^  The  advantage  of  his  "Naturalization"  scheme  is  supposed  to  be  "that  by 
this  means,  the  Price  of  Labour  is  continually  beat  down,  Combinations  of  Jour- 
neymen against  their  Masters  are  prevented,  Industry  is  encouraged  and  an  Emu- 
lation excited."  —  Ibid.,  p.  42.     C/!  p.  91. 

*  As  a  consequence  of  raising  the  elective  franchise  to  f2O0  for  tradesmen, 


52  Shifting  and  Incidence  of  Taxation 

down  the  Price  of  Labour  and  prevent  any  Combination." 
As  a  result  of  this  "  perhaps  the  morals  of  our  Poor  would 
be  as  unexceptionable  and  the  Price  of  Labour  as  cheap  as  in 
any  other  trading  country."  Later,  indeed,  Tucker  changed 
his  opinions  still  further ;  for  he  not  only  became  an  advocate 
of  a  direct  tax  on  luxuries,^  but  finally  abandoned  his  whole 
contention  as  to  the  efficacy  of  lov/  wages.^ 

The  doctrine  that  wages  do  not  rise  with  the  price  of  pro- 
visions was  also  developed  by  several  writers  who  objected 
to  the  restrictions  on  the  exportation  of  wheat.  They  did 
not  deny  that  prices  would  rise,  but  contended  that  high 
prices  of  food  would  mean  more  work  rather  than  higher 
wages.  Arthur  Young,  for  example,  not  only  states  that  "  in 
no  instance  will  you  find  that  labour  is  high,  because  pro- 
visions are  the  same,"  ^  but  he  adds  that  "  living  must  be 
rendered  dear  before  that  general  industry,  which  can  alone 
support  a  manufacturing  people,  will  be  rooted  amongst 
them."*  "High  taxes,"  he  continues,  "must  have  operated 
to  render  high  rates  of  labour  necessary  ...  in  those  coun- 
tries where  manufactures  make  the  greatest  shoots." 

The  most  complete  development  of  the  doctrine  that  ex- 
cises are  a  benefit  to  the  laborers  is  found  in  the  anonymous 

"the  privilege  of  voting  would  become  a  laudable  Inducement  to  every  Artificer 
(not  to  get  Drunk,  or  take  a  paltry  Bribe,  as  at  present  is  the  case)  but  to  be  fru- 
gal and  saving.  .  .  .  The  Number  also  of  the  Poor  would  consequently  be  les- 
sened: the  Price  of  Labour  reduced."  —  A  Brief  Essay,  pp.  52,  53. 

*  See  below,  pp.  86  and  61. 

2  Cf.Josiah  Tucker,  Economist.    By  W.  E.  Clark.    Columbia  University,  1903. 

'  The  Expediency  of  a  Free  Exportation  of  Corn  at  this  Time :  with  Some 
Observations  on  the  Bounty.  By  the  author  of  the  Farmer's  Letters  to  the  People 
of  England.     London,  2d  ed.,  1770,  p.  21. 

*  Ibid.,  p.  28.  The  same  ideas  are  expressed  by  Young  in  other  works.  So  in 
The  Farmer's  Letters  to  the  People  of  England,  London,  1767,  pp.  27-32,  where 
he  quotes  approvingly  the  tract  mentioned  in  the  next  note.  So  also  in  his 
Political  .Arithmetic,  containing  Observations  on  the  Present  State  of  Great  Britain 
and  the  Principles  of  her  Policy  in  the  Encouragement  of  Agriculture,  London, 
1774,  where  he  quotes  Houghton's  maxim  that  it  is  a  good  thing  "to  encourage 
the  people  to  a  high  living."  Young  comments  on  this  by  saying:  "The  idea 
of  encouraging  the  people  to  live  high,  is  a  very  bold,  but  I  believe  a  just  one." 
—  Ibid.,  pp.  no,  III. 


Those  who  discuss  the  General  Excise  53 

work  of  Temple,  who  wrote  shortly  before  Adam  Smith.  A 
riot  of  the  workingmen  in  London,  due  to  a  combination 
of  high  prices  of  food  and  a  lack  of  work,  took  place  in 
1765.  This  led  our  author  to  publish  a  tract,  in  which  he 
attempted  to  prove  that  high  prices  were  beneficial  to  the 
laborers  in  that  it  stimulated  their  industry.^  Five  years 
later  this  tract  was  rewritten  and  published  as  a  portly  vol- 
ume. In  it  he  advances  "  the  paradox  that  taxes  tend  to 
lower  the  price  of  labour,"  and  states  as  a  familiar  truth  that 
"  when  provisions  are  cheap,  labour  is  always  relatively  dear." 
The  three  self-evident  principles  on  which  the  whole  work 
rests  are  summarized  as  follows :  "  First,  that  mankind,  in 
general,  are  naturally  inclined  to  ease  and  indolence,  and 
that  nothing  but  absolute  necessity  will  enforce  labour  and 
industry.  Secondly,  that  our  poor,  in  general,  work  only  for 
the  bare  necessities  of  life,  or  for  the  means  of  a  low  debauch ; 
which,  when  obtained,  they  cease  to  labour  till  roused  again 
by  necessity.  Thirdly,  that  it  is  best  for  themselves,  as  well 
as  for  society,  that  they  should  be  constantly  employed."  ^ 

Temple  argues  that  as  laborers  are  far  more  anxious  to 
work  when  provisions  are  very  dear,  the  augmented  supply 
of  labor  at  such  times  brings  down  the  rate  of  wages.  "  A 
general  industry  is  immediately  created ;  workmen  croud 
about  the  houses  of  master-manufacturers,  begging  for 
work,   almost  at  any  rate  ;  and  they  work  five  or  six  days 

^  The  title  of  this  tract  clearly  explains  its  purpose :  Considerations  on  Taxes, 
as  they  are  supposed  to  affect  the  Price  of  Labour  in  our  Manufactures  :  also,  some 
Reflections  on  the  General  Behaviour  and  Disposition  of  the  Manufacturing  Popu- 
lace of  this  Kingdom  ;  showing,  by  Arguments  drawn  from  Experience,  that 
nothing  but  Necessity  will  enforce  Labour  ;  and  that  no  State  ever  did,  or  ever 
can  make  any  considerable  Figure  in  Trade,  where  the  Necessaries  of  Life  are  ai 
a  lo7u  Price.  London,  1765,  esp.  pp.  29-31.  Cunningham,  Growth  of  English 
Industry  and  Commerce  in  Modern  Times,  p.  560,  ascribes  it  to  Temple.  This 
William  Temple  was  originally  a  clothier  of  Trowbridge,  and  must  not  be  con- 
founded with  Sir  William  Temple,  who  entertained  much  the  same  views,  but 
who  wrote  in  the  preceding  century.     See  above,  p.  49. 

^  An  Essay  on  Trade  and  Commerce :  Containing  Observations  on  Taxes,  as 
they  are  supposed  to  affect  the  Price  of  Labour  in  our  Manufactories  :  together  with 
some  interesting  Reflections  on  the  Importance  of  our  Trade  to  Amerita.  By  the 
author  of  Considerations  on  Taxes.     London,  1770. 


54  Shifting  and  Incidence  of  Taxation 

in  the  week  instead  of  three  or  four.  Labour  being  a  kind  of 
commodity,  the  quantity  then  offered  tends  to  the  lowering 
its  price ;  and  would  do  so,  unless  art  or  violence  inter- 
vened. Thus  far  the  paradox  is  explained  by  experience  ; 
and  thus  far  it  is  proved,  that  dearness  of  provisions  tends 
to  lower  the  price  of  labour  in  manufactories."  ^  Temple 
then  proceeds  to  prove  the  other  side  of  the  same  proposi- 
tion, that  low  prices  of  food  lead  to  high  wages  and  dear 
work.  The  experience  of  Holland,  as  usual,  furnishes  him 
with  his  strongest  illustrations.  He  does  not,  indeed,  go  so 
far  as  to  recommend  any  further  increase  of  taxes  on  the 
laborer.^  But  he  is  at  considerable  pains  to  point  out  that 
the  taxes  thus  far  levied  on  the  necessaries  of  life,  whether 
in  the  shape  of  excises  or  of  impost  duties,  have  exerted 
none  but  a  good  influence  on  the  laborers  in  particular  and 
on  the  community  in  general.^ 

While  the  fullest  exposition  of  this  doctrine  is  found  in  the 
book  just  mentioned,  the  strongest  and  most  aphoristic  ex- 
pression of  the  idea  is  contained  in  another  work  of  William 
Temple,*  with  an  extract  from  which  our  series  of  quotations 
may  fitly  close.  Temple  contends  that  "the  only  way  to  make 
the  poor  temperate  and  industrious,  is  to  lay  them  under  a 
necessity  of  labouring  all  the  time  they  can  spare  from  meals 
and  sleep,  in  order  to  procure  the  common  necessaries  of 
life."^     And  after  adverting  to  the  experience  of  Holland,^ 

^  An  Essay  on  Trade  and  Commerce,  p.  1 6. 

2  Ibid.,  pp.  282-286. 

3  "  Of  what  infinite  consequence  then  is  it,"  he  exclaims  in  another  place, 
"  that  some  method  should  be  found  out  to  enforce  labour,  and  to  procure  habits 
of  sobriety  and  industry  among  the  manufacturing  populace."  —  Ibid.,  p.  31. 
Cf.  also  pp.  22  et  seq.  of  the  original  tract  of  1765. 

*  A  Vindication  of  Commerce  and  the  Arts,  proving  that  they  are  the  Source 
of  the  Greatness,  Power,  Riches  and  Populousness  of  a  State.  By  I.  B.,  M.D. 
[William  Temple].  London,  1758.  The  tract  has  been  reprinted  in  Lord  Over- 
stone's  Select  Collection  of  Scarce  and  Valuable  Tracts  on  Commerce.  London, 
1859. 

*  Overstone's  Select  Collection,  p.  534. 

6  <<  Wages  in  Holland  are  low  in  proportion  to  the  price  of  necessaries,  every- 
thing being  excessively  taxed  ;  the  people  from  hence  are  exceedingly  industri- 
ous."—  Ibid.,  p.  532. 


Those  who  discuss  the  General  Excise  55 

he  concludes  that  the  best  way  is  "  to  raise  a  fund  by  a  tax 
on  necessaries  in  a  time  of  plenty."  ^ 

In  the  face  of  the  virtual  unanimity  of  opinion  of  this 
considerable  number  of  authors,  it  would  seem  difftcult  for 
the  contrary  view  to  make  any  converts.  Nevertheless, 
although  it  was  not  at  first  a  popular  doctrine  among  economic 
writers,  the  theory  that  low  wages  are  not  necessarily  a 
benefit  to  a  country,  and  that  taxes  are  not  needed  to  reduce 
the  cost  of  labor,  gradually  made  headway  in  scientific  and 
commercial  circles. 

Perhaps  the  earliest  writer  to  deny  the  theory  that  low 
wages  are  good  for  a  country  was  Josiah  Child.  In  a  con- 
troversy with  Manley  he  takes  exception  to  the  statement 
that  "  it  is  the  Dearness  of  Wages  that  spoils  the  English 
Trade."  Child  lays  down  the  principle  that  "  wherever 
Wages  are  high  universally  thro'out  the  whole  World  it  is 
an  infallible  evidence  of  the  Riches  of  that  Country  :  and 
wherever  Wages  for  Labour  runs  low,  it  is  a  proof  of  the 
Poverty  of  that  Place."  ^  The  attempt  to  lower  wages,  he 
continues,  can  have  only  injurious  results,  and  leads  to  an 
emigration  of  the  people  to  countries  where  higher  wages 
are  paid.^  "  It  is  true,"  says  Child,  "our  Great  Grandfath- 
ers did  exercise  such  a  Policy  of  endeavoring  to  retrench  the 
price  of  Labour  by  a  Law  (although  they  never  could  affect 
it);  we  are  since,  with  the  rest  of  the  Trading  World,  grown 
Wiser  in  this  matter,  and  I  hope  shall  so  continue."*  At  the 
same  time,  Child  does  not  seem  to  have  abandoned  the  old 
theory  that  high  prices  of  food  are  good  for  the  workman. 
In  another  passage  he  discusses  the  influence  of  dear  food 

^  Overstone's  Select  Collection,  p.  516. 

^  A  Discourse  about  Trade,  wherein  the  Reduction  of  Interest  of  Money  to  4  i. 
per  Centum  is  Recommended,  etc.  [By  Josiah  Child.]  London,  1690,  Preface, 
pp.  II,  12.  In  1693  a  textual  reproduction  of  this  work,  harrinjj  the  omission  of 
"The  Publisher  to  the  Reader,"  appeared  under  the  title  A  New  Discourse  of 
Trade  wherein  is  recommended  several  weighty  Points,  etc.  In  the  second  edition 
of  1693  and  all  subsequent  editions  this  title  is  repeated. 

'"If  we  retrench  by  Law  the  Labor  of  the  People,  we  drive  thcni  from  us  to 
other  Countries  which  give  better  Kates."  —  Ibid.  *  Ibid.,  p.  ij. 


56  Shifting  and  Incidence  of  Taxation 

on  industry  very  much  in  the  style  of  the  older  writers.^  He 
even  goes  so  far  as  to  speak  about  excises  as  conducing  to 
thrift.'^  So  that  Child  can  scarcely  be  considered  an  oppo- 
nent of  the  older  theory  so  far  as  concerns  its  application 
to  finance. 

The  clearest  of  the  early  writers  to  prove  the  economy  of 
high  wages  was  John  Gary,  whose  views  on  another  point 
have  already  been  mentioned.^  Gary  puts  the  problem  as 
follows :  "  Whether  the  Price  of  Labour  discourages  our 
Manufactures  or  hinders  Improvements  in  our  Product  ?  " 
He  solves  the  problem  by  stating  "  that  both  our  Product 
and  Manufactures  may  be  carried  on  to  advantage  without 
running  down  the  labour  of  the  Poor."  He  then  proceeds 
to  state  his  argument  under  two  heads.  First,  as  regards 
the  productions  of  the  soil,  says  Gary,  it  should  be  remem- 
bered that  nominal  wages  must  vary  with  the  price  of  food.* 
Therefore  a  reduction  of  wages  implies  a  lowering  of  prices ; 

1  "The  Poor  live  better  in  the  dearest  Countries  for  Provisions,  than  in  the 
cheapest,  and  better  in  a  dear  year  than  in  a  cheap,  (especially  in  relation  to  the 
Publique  Good),  for  that  in  a  cheap  year  they  will  not  work  two  days  in  a  week; 
their  humour  being  such,  that  they  will  not  provide  for  a  hard  time  ;  but  just 
work  so  much  and  no  more,  as  may  maintain  them  in  that  mean  condition  to 
which  they  have  been  accustomed."  This  passage  was  first  printed  in  Child's 
earlier  work  :  Brief  Observations  concerning  Trade  and  Interest  of  Aloney,  By 
J.  C.  London,  i568,  p.  H.  It  is  reproduced  in  the  Discourse  about  Trade,  on 
p.  19  of  the  portion  entitled  "A  Discourse  concerning  Trade."  It  also  appears 
in  the  later  editions. 

2  "  The  Abatement  of  Interest  conjoynt  with  Excises  upon  our  home  consump- 
tion are  two  of  the  most  comprehensive  and  effectual  Sumptuary  Laws  that  ever 
were  established,  and  most  necessitating  and  engaging  any  People  to  thriftiness, 
the  high  Road  to  Riches."  —  A  Discourse  about  Trade,  p.  27  of  the  part  entitled 
"Trade  and  Interest  of  Money  considered."  It  was  probably  these  passages  that 
caused  Arthur  Young  in  his  Farmer's  Letters,  p.  29,  to  mention  Child  as  having 
"concurred  in  the  same  observations"  that  he  made.     See  above,  p.  52. 

'  See  above,  p.  40. 

♦  "  As  for  the  first,  our  Product,  I  am  of  opinion  that  the  running  down  the 
Labour  of  the  Poor  is  no  advantage  to  it,  nor  is  it  to  the  Interest  of  England  to  do 
it,  nor  can  the  People  of  England  live  on  such  low  Wages  as  they  do  in  other 
Countrys;  for  we  must  consider  that  Wages  must  bear  a  Rate  in  all  Nations 
according  to  the  prices  of  Provisions." — An  Essay  on  the  State  of  England,  etc. 
By  John  Cary.     Bristol,  1695,  p.  144. 


Those  who  discuss  the  General  Excise  57 

and  lower  prices  involve  a  diminution  in  the  value  of  land. 
"  You  cannot  fall  Wages  unless  you  fall  Product,  and  if  you 
fall  Product,  you  must  necessarily  fall  Land."  ^  Secondly, 
as  regards  manufactured  articles,  he  continues,  people  have 
only  to  look  at  them,  to  see  that  prices  have  been  continually 
falling  without  any  corresponding  decrease  in  wages.-  "  But 
then  the  question  will  be,  how  this  is  done  .''  I  answer.  It 
proceeds  from  the  Ingenuity  of  the  Manufacturer,  and  the 
Improvements  he  makes  in  his  ways  of  working."  He  then 
proceeds  to  show  how  machinery  effects  this  result,^  and  con- 
cludes that  "  New  Projections  are  every  day  set  on  foot  to 
render  the  making  of  our  Manufactures  easie,  which  are 
made  Cheap  by  the  Heads  of  the  Manufacturers,  not  by  fall- 
ing the  Price  of  poor  Peoples  Labour."  * 

Although  this  most  suggestive  passage  shows  how  old  are 
some  of  the  most  modern  views  on  industry,  for  some  time 
comparatively  little  application  of  them  was  made  to  prob- 
lems of  taxation.  We  do,  indeed,  find  in  the  ensuing  decades 
some  incidental  allusions  to  the  impolicy  of  taxing  wages. 
Thus,  one  interesting  writer  states  that  "  the  labour  of  the 
meaner  sort  of  people  is  of  too  great  consequence  to  a  trad- 
ing  Nation    to  be  any  way  slighted   or  disregarded."^      A 

1  An  Essay  on  the  State  of  England,  p.  145. 

2  "Observation,  or  Experience  of  what  hath  been  done,  we  have  and  daily  do 
see  that  it  is  so;  the  Refiners  of  Sugar  lately  sold  for  Six  Pence  per  Pound  what 
yielded  twenty  Years  since  Twelve  Pence;  the  Distillers  sell  their  Spirits  for  one 
third  part  of  what  they  formerly  did;  Glass  Bottles,  Silk-Stockings  and  other 
Manufactures,  (too  many  to  be  enumerated)  are  sold  for  half  the  Prices  they  were 
a  few  Years  since,  without  falling  the  Labour  of  the  Poor."  —  Ibid. 

'  "All  which  save  the  Labour  of  many  Hands,  so  the  Wages  of  those  imployed 
need  not  be  lessened."  —  Ibid.,  p.  146. 

*  Ibid.,  p.  147. 

^  This  pamphleteer  was  opposed  to  the  employment  of  foreigners.  After 
showing  the  advantages  of  employing  home  workmen,  he  proceeds  :  "  and  since 
the  very  meanest  under-workers  in  Wool  contribute  in  some  measure  towards  the 
support  of  the  State,  and  the  movement  of  the  great  wheels  of  Trade;  it  seems  a 
peculiar  hardship  upon  them,  as  well  as  inconsistency  in  the  management  of  affairs 
here,  first  to  put  them  under  a  necessity  of  raising  their  Wages,  by  taxing  many 
of  the  necessaries  of  life;  and  afterwar<ls  to  make  the  dearncss  of  their  labour, 
occasion'd  by  those  Taxes,  the  very  ground  and  reason  of  discouraging,  or  declin- 


58  Shifting  and  Incidence  of  Taxation 

few  years  later,  Nugent  states  emphatically :  "  one  thing  is 
certain,  that  no  good  can  be  produced  by  taxes  upon  com- 
modities. They  may  starve  the  industrious,  but  they  never 
will  induce  the  idle  and  extravagant  to  labour  and  to  save."  ^ 
In  the  second  quarter  of  the  eighteenth  century,  however,  a 
more  vigorous  attack  was  made  on  the  premises  as  well  as 
on  the  conclusions  of  the  partisans  of  the  excise. 

Among  the  most  important  of  these  writers  was  Vander- 
lint.  At  first  sight,  he  seems  to  maintain  that  prosperity 
can  be  attained  only  through  a  reduction  of  wages.^  Yet, 
notwithstanding  the  fact  that  he  demands  an  abolition  of 
taxes  on  necessaries  for  this  reason,^  Vanderlint  is  in  reality 
a  strenuous  advocate  of  higher  remuneration  for  the  workman. 
The  lowering  of  wages  at  which  he  aims  is  merely  a  seeming 
reduction  due  to  the  abolition  of  taxes  and  to  an  increase  in 
the  money  supply.  Prices,  he  thinks,  will  fall  still  more,^  which 
of  course  means  a  relative  rise  in  wages.^  Vanderlint  is,  in 
fact,  a  strong  believer  in  the  theory  that  a  high  standard  of 
life  for  the  laboring  population  is  much  to  be  desired.^     He 

ing  to  make  use  of  English  hands,  and  of  employing  foreign  (as  in  this  view  we 
must  account  Irish)  hands  in  their  stead."  —  The  Grasiers'  Complaijit  and  Peti- 
tion for  Redress  :  or  the  Necessity  of  Restraining  Irish  Wool  and  Yarn  ;  and  of 
Raising  and  Supporting  the  Price  of  Wool  of  the  Growth  of  Great  Britain  con- 
sider''d.     By  a  Lincolnshire  Grasier.     London,  1726,  pp.  44,  45. 

^  Considerations  upon  a  Reduction  of  the  Land  Tax.  [By  Robert  Nugent.] 
London,  1749,  p.  17. 

2  "  Reducing  the  present  Rates  of  Labour  appears  to  me  absolutely  necessary 
to  increase  .  .  .  Trade."  —  Preface  to  Money  answers  all  Things :  or,  an  Essay 
to  make  Money  sufficiently  Plentiful  amongst  all  Ranks  of  People,  and  Increase 
our  Foreign  and  Domestick  Trade,  Fill  the  Empty  Houses  with  Inhabitants,  En- 
courage the  Marriage  State,  Lessen  the  Number  of  Hawkers  and  Pedlars,  and  in 
a  great  measure,  prevent  giving  long  Credit,  and  making  bad  Debts  in  Trade. 
By  Jacob  Vanderlint.     London,  1 734. 

^  "  I  do  verily  believe  that  taking  the  Taxes  intirely  off  the  Things  the  work- 
ing People  consume  is  so  absolutely  needful,  that  Labour  can  hardly  be  reduced 
without  it."  —  Ibid.,  p.  159. 

*  This  is  shown,  among  other  things,  by  the  title  of  the  work.  It  was  this 
grievous  error  about  money  which  served  to  consign  the  book  to  oblivion,  not- 
withstanding its  many  good  points.         ^  Ibid.,  pp.  34,  69,  and  esp.  86,  87. 

6  Among  the  reasons  advanced  is  that  higher  wages  will  conduce  to  better 
work :  "  The  working  People  can  and  will  do  a  great  deal  more  Work  than  they 


Those  who  discuss  the  G enteral  Excise  59 

is  even  the  first  writer  to  advance  a  doctrine  that  has  only 
recently  come  into  prominence  —  the  doctrine  that  as  the 
laborers  form  the  mass  of  consumers,  the  large  consumption 
which  gives  the  impetus  to  profitable  production  and  general 
prosperity  itself  depends  on  the  purchasing  power  of  the 
consumers,  —  that  is,  on  the  high  wages  and  the  high 
standard  of  life  among  the  laborers.^ 

Twenty  years  later,  NickoUs  [Dangeul]  went  to  the  root  of 
the  matter  when  he  stated,^  "  We  have  flattered  ourselves 
too  much,  if  we  have  believed  that  on  augmenting  the  taxes 
upon  the  consumption,  we  should  bring  our  workmen  to  the 
sobriety,  or  frugality  of  a  Frenchman,  who  lives,  or  rather 
starves,  upon  roots,  chestnuts,  bread  and  water ;  or  to  the 
thriftiness  of  a  Dutchman,  who  contents  himself  with  dried 
fish,  and  butter-milk.  When  our  workmen  can  no  longer 
raise  the  price  of  their  work  to  their  mind,  there  still  remain 
two  great  refuges  to  them  from  labor,  the  Parish  and 
Robbing."  ^ 

The  most  popular  exponent  of  the  newer  doctrine  was 
Postlethwayt.  In  a  passage  which  is  practically  a  plagiarism 
of  the  one  just  quoted  from  Dangeul,  Postlethwayt  objects  to 
taxes  on  the  mass  of  consumers.*     It  is  true,  indeed,  he  says, 

do,  if  they  were  sufficiently  encouraged.  For  I  take  it  for  a  Maxim,  that  the 
People  of  no  Class  will  ever  want  Industry,  if  they  don't  want  Encouragement." 
—  Ibid.,  pp.  122,  123. 

^  He  objects  to  any  scheme  for  "making  the  Poor  fare  harder,  or  consume  less 
than  their  reasonable  Wants  in  that  Station  require;  for  they,  being  the  Bulk  of 
Mankind,  would  in  this  Case  affect  the  Consumption  of  Things  in  general  so 
mightily,  that  there  would  be  a  Want  of  Trade  and  Business  amongst  the  other 
Part  of  the  People."  —  Ibid.,  p.  69,  note.  (In  reality  this  shoulii  he  page  61,  as 
the  headings  of  pp.  65-72  are  printed  twice  by  mistake.)      Cf.  p.  Si. 

^  Remarks  on  the  Advantages  and  Disadvantages  of  France  and  of  Great 
Britain  with  Respect  to  Commerce.      1754.     See  above,  p.  44,  note  i. 

'  Ibid.,  pp.  261,  162. 

*  "  Augmenting  Taxes  on  our  Consumption,  has  not  brought  our  Workmen  to 
the  Sobriety  or  Frugality  of  a  Frenchman  or  to  the  Thriftiness  of  a  Dutchman : 
and  when  our  Workmen  cannot  raise  the  Price  of  their  I^bor  and  Workmanship 
to  the  Degree  they  would,  they  have  recourse  to  the  Parish  or  Robbery."  — 
Great  Britain's  True  System.  By  Malachy  Postlethwayt,  Esq.  London,  1757, 
p.  160.      For  the  full  title,  see  the  bibliography. 


6o  Shifting  and  Incidence  of  Taxation 

that  wages  are  fixed  by  the  price  of  food.  ^  But  the  increase 
of  wages  due  to  a  tax  will  increase,  not  decrease,  the  cost  of 
production,  and  will  put  the  country  at  a  disadvantage  in 
competition  with  foreigners.  The  result  will  be  the  ruin  of 
the  whole  community,  of  course  including  the  laboring  class. 
An  artificial  rise  in  wages  through  taxation,  in  his  opinion, 
gives  "  superaddition  of  value "  to  the  country's  products, 
which  can  only  be  harmful  to  all  concerned.^  But,  as  he 
points  out  in  another  work,  high  wages  and  leisure  for  the 
workman,  when  created  by  natural  causes,  are  the  surest 
guarantee  of  good  work  and  bountiful  production.  ^  Massie, 
another  popular  writer  of  the  same  period,  expressed  a 
similar  conclusion  very  forcibly  in  the  title  of  a  work  de- 
signed to  prove  that  the  excise  would  be  a  "  pinchbelly  tax  " 
to  the  workingmen.* 

The  point  could  not  have  been  put  more  plainly  than  by 
Nathaniel  Forster,  who  pours  out  the  vial  of  his  wrath  upon 
those  persons  who  have  "  the  hardiness  to  assert  that  high 
taxes  upon  the  necessaries  of  life  contribute  in  their  conse- 
quences even  to  the  more  plentiful  production  of  them  and 
that  the  poor  will  be  industrious  only  in  the  degree  that  they 
are   necessitous."^     Forster   terms   this  "a   doctrine  which 

1  «  Where  Food  and  Cloathing,  the  Necessaries  for  a  Day,  are  purchased  for  a 
little,  there  Wages  will  be  low,  or  Labor  Cheap."  —  Great  Britain's  True  Sys- 
tem, p.  144. 

2  "  When  the  general  Price  of  Labor  soars  above  its  natural  Standard,  and 
thereby  an  artificial  Value  is  superadded  to  our  Produce  and  Manufacture,  beyond 
which  our  Rivals  do,  we  must  lose  our  Dominion  in  Trade  ;  and  our  Ruin  then 
cannot  be  far  distant :  and  this  Superaddition  of  Value  to  our  Commodities  arises 
solely  from  the  Modus  wherein  our  Taxes  are  laid  and  raised."  —  Ibid.,  p.  158. 

^  The  Universal  Dictionary  of  Trade  and  Commerce.  London,  1 751,  vol.  i. 
Preliminary  Discourse. 

*  Reasons  humbly  offered  against  laying  any  further  tax  upon  Malt  or  Beer, 
shelving  that  such  a  tax  would  not  only  cause  great  Losses  to  the  Landholders  of 
England,  but  be  prejudicial  to  several  branches  of  our  Manufactures,  and  prove 
a  pinchbelly  Tax  to  some  hundred  thousand  Families  of  Labouring  People.  By 
J.  Massie.     London,  1760.     For  other  views  of  Massie,  see  below,  chap.  iii. 

^  An  Enquiry  into  the  Causes  of  the  Present  High'  Price  of  Provisions.  In 
Two  Parts:  I  Of  the  General  Causes  of  this  Evil;  II  Of  the  Causes  of  it  in 
some  particular  Instances.     [By  Nathaniel  Forster.  ]     London,  1 767,  p.  49. 


Those  who  discuss  the  General  Excise  6i 

avarice  in  private  life  has  greedily  seized,  and  has  not  failed 
to  improve  to  its  own  purposes."  "  But  it  is  a  doctrine,"  he 
adds,  "as  false,  as  it  is  inhuman."^  He  proceeds  to  show 
that  it  is  necessarily  false ;  for,  says  he,  if  harder  work  means 
lower  wages,  taxes  will  lead  not  to  industry,  but  to  the  reverse. 

This  marked  the  turning-point  in  the  controversy.  Some 
authors,  like  Tucker,  were  now  convinced  that  their  previous 
views  had  been  erroneous.  Tucker,  in  fact,  wrote  a  special 
tract  designed  to  prove  that  countries  where  high  wages  are 
paid  can  successfully  compete  with  those  in  which  the  rate  of 
wages  is  low.^  Higher  wages,  says  he,  do  not  necessarily 
imply  greater  cost  of  production,  for  the  larger  remuneration 
of  the  laborer  is  compensated  by  his  greater  skill.  "  Is  it 
not  much  cheaper,"  asks  Tucker,"  to  give  2s.  6d.  a  Day  in 
the  rich  Country  to  the  nimble  and  adroit  Artist,  than  it  is  to 
give  only  6d.  in  the  poor  one,  to  the  tedious,  aukward  Bung- 
ler." ^  In  the  same  way  Schomberg  expresses  the  newer 
theory  in  the  statement  that  "  labour  in  a  country  of  low 
wages  is  comparatively  dearer,  than  where  wages  are  high  ;  "* 
and  the  American  Webster  pokes  fun  at  the  old  doctrine.^ 

Thus  we  see  that  in  the  third  quarter  of  the  eighteenth 
century  the  belief  that  taxes  on  labor  would  benefit  the  com- 
munity by  acting  as  a  spur  to  industry  was  seriously  shaken. 
When  this  doubt  was  reinforced  by  the  more  general  theory 
already  discussed,''  that  taxes  on  the  poor  are  a  hardship  for 

^  An  Enquiry  into  the  Causes  of  the  Present  High  Price  of  Provisions,  p.  55. 

2  Fottr  Tracts  on  Political  ami  Commercial  Subjects.  By  Josiah  Tucker,  D.D. 
2d  ed.,  1774.  Tract  I:  "Whether  a  rich  Country  can  stand  a  Competition  with 
a  poor  Country  (of  equal  natural  Advantages)  in  raising  of  Provisions  and  Cheap- 
ness of  Manufactures."  ^  Ibid.,  p.  34. 

*  Historical  and  Political  Remarks  upon  the  Tariff  of  the  Commercial  Treaty  : 
With  Preliminary  Observations.    [By  A.  C.  Schomberg.]    London,  1787,  p.  156. 

^  "  I  have  heard  a  stupid  and  cruel  argument  urged,  that  ta.\ing  labor  has  this 
advantage  that  it  promotes  industry  because  it  increases  necessity.  This  argu- 
ment proves  in  a  very  cogent  manner,  that  it  is  best  to  make  everybody  poor,  be- 
cause it  will  make  them  work  the  harder."  —  A  Sixth  Essay  on  Free  Trade  anJ 
Finance.  By  a  Citizen  of  Philailclphia,  1783.  Reprinted  in  Political  Essays.  By 
Pelatiah  Webster.     Philadelphia,  179 1,  p.  239. 

*  See  above,  pp.  40-43. 


62  Shifting  a^td  Incidence  of  Taxation 

them,  whatever  be  the  result  on  the  community  at  large,  the 
day  of  complete  confidence  in  the  excise  had  gone  by.  The 
point  to  be  emphasized  is  that  the  advocates,  as  well  as 
the  opponents  of  the  excise,^  agreed  as  to  their  theory  of  in- 
cidence ;  and  that  some  defended,  while  others  objected  to, 
this  system  of  the  taxation  of  necessaries  precisely  because,  in 
their  opinion,  it  rested  on  the  poor.  Their  general  doctrine 
of  incidence,  in  short,  was  that  the  excise  rests  on  the  mass  of 
the  consumers. 

3.    The  Excise  is  shifted  to  the  Landowners 

As  compared  with  the  writers  discussed  in  the  previous 
section,  there  were  few  who  maintained  that  the  incidence  of 
the  excise  as  such  is  on  the  landowner.  There  were,  indeed, 
some  influential  thinkers  who  held  that  all  taxes  are  shifted 
to  the  land.^  But  the  special  doctrine  which  singled  out  ex- 
cises as  the  particular  taxes  that  finally  rest  on  land  met  with 
comparatively  little  support. 

Probably  the  first  writer  to  advance  this  theory  was  an 
anonymous  pamphleteer  of  the  last  decade  of  the  seventeenth 
century.  He  is  concerned  especially  with  "  a  Home-Excise 
upon  things  eatable  and  drinkable,  and  several  other  Merchan- 
dizes which  are  sold  in  the  Market."  ^  The  ordinary  state- 
ment that  an  excise,  which  he  calls  "a  troublesome  and  slavish 
sort  of  Tax,"*  rests  on  the  consumer  is  declared  by  him  to 
be  an  error.  For  example,  the  more  the  farmer  has  to  pay 
for  the  commodities  of  his  own  consumption,  says  he,  the  less 
he  will  be  able  to  pay  as  rent.^     The  farmers  and  the  land- 

1  With  the  exception  of  Vanderlint,  whose  attitude  is  explained  below,  p.  107. 
'  See  below,  chap,  v, 

*  Some  Considerations  about  the  most  proper  Way  of  Raising  Money  in  the 
Presetti  Conjuncture.     London,  n.  d.,  circa  1692,  p.  15. 

*  Ibid.,  p.  27. 

^  "  The  common  argument  for  an  Excise,  That  it  will  spare  our  Lands ;  is 
grounded  upon  a  false  Supposition :  This  is  not  a  sparing  our  Lands,  but  a  charg- 
ing them  for  ever  with  double  what  is  needful.  The  dearer  the  Farmer  pays  for 
his  Commodities,  the  less  Rent  he  will  pay;   and  the  less  his  Product  yields  him 


Those  who  discuss  the  General  Excise  63 

owners,  moreover,  will  be  the  only  ones  to  suffer.  For  if  a 
tax  be  imposed  on  some  of  the  farmer's  own  products,  as  for 
instance  on  malt,  he  will  have  to  bear  the  greater  part  or  the 
whole  of  the  tax,  because  otherwise  there  would  be  a  con- 
siderable falling  off  in  the  demand  and  a  consequent  diminu- 
tion of  price.  The  brewers  will  be  the  real  gainers,  for  they 
will  get  their  raw  material  cheap  and  will  sell  the  finished 
product  at  the  old  price.^  The  author,  it  thus  appears,  is  not 
very  clear  in  explaining  why  a  tax  would  cause  the  price  of 
manufactured  articles  to  rise,  but  would  have  no  such  effect 
on  agricultural  products. 

Another  writer  of  the  same  period  makes  the  statement 
that  "  A  General  Excise  upon  Home  Commodities  is  a  real 
Land  Tax,  and  will  have  the  same  Influence  upon  the  Value 
of  Lands  and  Rents,  as  that  we  call  a  Land  Tax,  or  Monthly 
Assessment  hath."  2  He  is  aware  of  the  general  principle 
that  prices  fall  with  the  increase  of  supply ;  "^  but  he  thinks 
that  the  supply  of  commodities  in  England  is  so  great  that 
the  market  is  at  the  mercy  of  the  purchaser.*     A  tax  on  com- 

clear,  accordingly  he  must  value  his  Farm.  The  more  (for  example)  is  laid  on  Lead, 
the  less  will  Woods  and  Oar  yield;   and  so  of  other  Commodities."  —  Ibid.,  p.  28. 

1  "  It  is  evident,  this  Tax  will  fall  very  hard  everywhere  upon  the  poor  Farmers; 
and  those  who  are  best  able  to  pay  it,  will  be  most  spared :  For  example,  if  an 
Excise  should  be  laid  upon  Malt,  where  will  the  Burden  lye?  The  price  of  it 
will  certainly  sink  in  the  Countrey,  for  want  of  Consumption,  by  reason  of  the  new 
Imposition.  The  Brewers  in  great  Cities  and  Towns  .  .  .  will  be  the  only  Gain- 
ers, since  they  will  buy  their  Malt  cheap,  and  sell  their  drink  as  dear  or  dearer 
than  before.     And  the  poor  Farmer  will  bear  the  loss."  —  IbiJ.,  p.  29. 

"^  An  Essay  upon  Taxes,  calculated  for  the  Present  Juncture  0/  Affairs  in  Eng- 
land. London,  1693,  p.  10.  The  copy  in  the  possession  of  the  present  writer  is 
ascribed  by  its  former  possessor,  but  probably  without  reason,  to  Sir  William 
Temple.     Others  ascribe  it  to  the  Marquis  of  Halifax. 

^  "  If  the  Necessity  of  the  Buyer  be  greater  than  the  Seller,  the  Market  will  rise ; 
but  if  that  of  the  Seller  be  greater  than  the  Buyer,  the  Price  of  Commodities  must 
fall;  and  any  Duty  laid  upon  Commodities  will  lye  upon  either  accordingly."  — 
Ibid.,  pp.  10-12. 

*"But  as  to  the  present  Case  in  F^ngland,  I  think  that  there  is  nothing  mure 
apparent,  than  the  Plenty  of  Home  Commodities,  and  the  want  of  People  to  con- 
sume them  •  .  .  ;  the  consequence  of  which  necessarily  will  be,  That  whatever 
Duty  is  impos'd  upon  the  Commodity,  the  Buyer  will  have  it  so  much  the 
cheaper."  —  Ibid.,^.  12. 


64  Shifting  and  Incidence  of  Taxation 

modities,  therefore,  must  fall  on  the  producer  or  seller;  and, 
since  everything  is  a  product  of  the  land,  a  tax  on  products  is 
a  tax  on  land.^ 

At  the  time  of  the  controversy  over  Walpole's  excise 
scheme,  we  find  the  same  views  in  a  number  of  pamphlets 
designed  to  show  the  injurious  consequences  of  the  tax.  Of 
these,  the  ablest  are  by  Pulteney  ^  and  Amhurst.^  Few  of 
these  writers  distinguish,  in  their  discussions  of  the  incidence 
of  the  tax,  between  the  landlord  and  the  farmer  who  rents 
the  land.  One  writer,  however,  goes  into  the  question  a  little 
more  fully.  He  maintains  that  just  as  a  land  tax  levied 
on  the  occupier  or  farmer  is  shifted  to  the  owner  of  the 
land,*  so  an  excise  tax,  — for  instance  on  salt,  —  even  though 
it  reach  the  farmer,  is  ultimately  paid  by  the  landlord  through 
a  fall  in  rent.^  Even  assuming,  however,  that  the  excise  is 
shifted  to  the  poor  consumer,  he  will  not  suffer  in  the  long 
run.  For  if  the  excise  takes  the  place  of  the  land  tax,  the 
landlord  will  have  more  to  spend  "  in  Hospitality  "  as  well  as 

1  "  A  general  Excise  and  a  Land  Tax  differ  not  essentially,  since  both  are  a  Duty 
upon  the  same  Commodities,  which  are  the  Product  of  Land."  —  An  Essay  upon 
Taxes,  etc.,  p.  11.  As  the  object  of  the  author  is  to  diminish  the  burden  upon 
land,  he  therefore  favors  a  general  property  tax.     See  below,  chap.  iv. 

'^  The  Case  of  the  Revival  of  the  Salt  Duty  fully  stated  and  considered  with 
some  Remarks  on  the  Present  State  of  affairs,  in  answer  to  a  late  Pamphlet  intitled 
a  Letter  to  a  Freeholder  on  the  Reduction  of  the  Land  Tax  to  one  Shilling  in  the 
Pound.  In  a  Letter  from  a  Member  of  the  House  to  a  Gentleman  in  the  Country. 
[By  William  Pulteney.]  London,  1732.  The  author  quotes  Locke's  statement 
that  all  taxes  fall  on  land,  but  adds :  "  I  could  cite  a  great  deal  more  to  the  same 
Purpose  .  .  .  ;  but  I  chuse  to  decline  it,  lest  I  should  be  represented  as  an  Advo- 
cate for  Land  Taxes;  whereas  my  great  Desire  is  that  our  Taxes  in  general  may 
be  lessen'd." — p.  49.  Cf  his  views  as  to  the  effect  of  taxes  on  necessaries  and 
wages,  p.  54. 

^  An  Argument  against  Excises,  in  several  Essays  lately  published  in  the 
Craftsman,  and  now  collected  together.  By  Caleb  D'Anvers  of  Gray's  Inn,  Esq. 
[Lord  Nicholas  Amhurst.]     London,  2d  ed.,  1733.     See  especially  pp.  67  and  76. 

*  "Tho  these  Charges  are  paid  immediately  by  the  occupier,  yet  they  fall  ulti- 
mately on  the  Landlord;  who  is  obliged  on  these  accounts  to  let  his  Land  so 
much  the  cheaper."  —  The  Case  of  the  Salt-Duty  and  Land-  Tax  offered  to  the 
Consideration  of  every  Freeholder.     London,  1732,  p.  10. 

^  "  It  is  a  Tax  that  does  not  affect  the  Farmer,  for  he  hires  his  Land  the  cheaper 
of  his  Landlord."  —  Ibid.,  p.  11. 


Those  who  discuss  the  Getieral  Excise  65 

in  the  "Improvement  of  his  Estates"  ;  and  the  laborer  will 
be  the  person  to  reap  the  benefit.^  The  honesty  of  our 
author's  statements,  as  well  as  his  logic,  is,  however,  open  to 
criticism ;  for  while  the  other  writers  object  to  the  excises 
because  they  affect  the  landed  interest,  he  is  strongly  in 
favor  of  the  scheme,  while  at  the  same  time  he  is  strenuously 
opposed  to  any  increase  in  the  land  tax.^ 

The  view  that  particular  excises  are  ultimately  borne  by 
the  landowner  was  quite  common  later  on.''  Even  as  late  as 
1790  we  are  told  that  the  trend  of  opinion  was  against  the 
malt  tax  chiefly  for  the  reason  that  "  the  tax  was  partial 
against  the  landlord,  on  whom  it  would  ultimately  fall,  and 
who  should  afterwards  be  relieved  of  his  burden."  *  And 
Adam  Smith  himself  found  it  necessary  to  argue  that  an  ex- 
cise on  malt  would  not  affect  "  the  rent  or  profit  of  barley 
land."  ^  It  is  perhaps  as  a  reflex  of  this  tendency  in  theory 
that  we  find  similar  ideas  expounded  by  a  Scotch  writer  who, 
in  referring  to  the  recent  vigorous  enforcement  of  the  excise 
on  ale,  drew  a  close  connection  between  the  falling  off  in  the 
consumption  of  ale  and  the  decrease  in  the  price  of  farms."  ^ 

^  If  the  dealer  pays  the  duty,  he  shifts  to  the  consumer.  "  Who  is  then  the 
Sufferer.  If  anybody,  it  is  the  Labourer :  but  it  will  be  found  that  he  has  no  reason 
to  complain."  —  Ibid.,  p.  13. 

2  The  land  tax  he  calls  a  "  partial  tax,"  for  "  every  one  knows  that  Personal 
Estates  are  seldom  or  never  charged  :  for  Money  is  of  a  transitory  Nature;  it  shifts 
so  often  from  Place  to  Place,  and  Person  to  Person,  that  'tis  impossible  to  know 
where,  or  in  whose  hands  to  charge  it."  —  Ibid.,  p.  9.  Furthermore,  it  is  in  his 
opinion  very  unequal  in  different  parts  of  the  Kingdom.  QC  p.  16.  He  proposes 
accordingly  a  freeing  of  the  land,  and  thinks  that  "  it  might  be  done  by  laying 
a  Tax,  either  on  one  or  two  Species  of  Commodities  in  common  use,  or  on  some 
favourite  vanities  of  Mankind."  —  Ibid.,  p.  17. 

'  See,  e.g.,  the  views  of  Davenant  on  the  malt  tax,  infra,  chap.  v. 

*  .4n  Enquiry  into  the  Principles  of  Taxation,  1790,  p.  138. 

^  Wealth  of  Nations,  book  v,  ch.  ii,  pt.  ii,  art.  iv. 

^  A  short  View  of  the  Prejudice  arising  both  to  the  Country  and  Rn>enue  from 
the  Imposition  on  Ale  and  Beer  granted  to  the  City  of  Edinburgh  and  other 
Boroughs  in  Scotland  humbly  submitted  to  the  Consideration  of  the  Proprietors 
and  Farmers  of  iMnd,  etc.  Edinburgh,  1748,  p.  5.  Cf.  for  a  somewhat  similar 
view  the  interesting  tract  entitled  The  Case  of  the  County  of  Devon  with  respect 
to  the  Consequences  of  the  new  Excise  Capital  Duty  on  Cider  and  Perry.  Lx^ndon, 
1763- 


66  Shifting  attd  Incidence  of  Taxation 

4.    The  Excise  rests  on  the   Traders 

Our  survey  of  the  different  views  held  as  to  the  excise 
would  not  be  complete  without  mentioning  those  writers 
who  maintained  that  the  tax  was  not  shifted  at  all,  but  rested 
on  the  merchant  who  originally  paid  it.  The  first  appearance 
of  this  doctrine  is  found  shortly  after  the  imposition  of  the  ex- 
cise in  the  seventeenth  century,  when  an  ostensible  repre- 
sentative of  a  group  of  women-workers  voiced  her  complaints 
on  this  score  in  a  most  remarkable  poetical  effusion.^ 

A  few  years  later,  however,  a  writer  of  the  sterner  sex 
treats  the  subject  more  seriously  from  the  same  point  of  view, 
but  with  some  new  arguments.  The  trader,  he  thinks,  suf- 
fers from  the  excise  in  several  ways.  In  the  first  place,  when 
the  goods  are  imported  he  advances  the  money,  and  thus 
renders  necessary  the  employment  of  a  large  capital,  which, 
moreover,  is  frequently  lost  by  the  failure  of  the  creditor  to 
discharge  his  obligation.^     In  addition,  not  only  does  the  in- 

^  The  Good  IVomens  Cryes  against  the  Excise  of  all  their  Commodities.  Shew- 
ing, As  the  businesse  now  stands,  they  are  in  no  Case  able  to  bear  such  heavy 
Pressures  and  insupportable  Burthens,  occasioned  by  the  /uncto's  new  Impost  on 
their  Wares,  whereby  they  are  like  to  fall  into  great  want  of  Trading,  and  putting 
off  their  Commodities  at  the  prices  formerly,  to  the  utter  undoing  of  their  deare 
Husbands  and  Families  for  ever.  Therefore  having  a  Fellow-feeling  of  one  an- 
others  lamentable  and  languishing  Cases,  {notwithstanding any  Act  to  the  contrary') 
have  put  forwards  themselves  to  seeke  redresse  of  their  aggrievances,  and  inabilities 
of  their  overburthened  Husbands  instfficiencies  and  unsatisfying  performances  in 
their  sever  all  Occupations  ;  have  convened  together  in  a  Feminine  Convention  in 
Doe-little  lane^  and  tendred  their  aggrievances  and  complaints  to  the  consideration 
of  the  Commonwealth  ;  desiring  speady  redresse  therein.  Written  by  Mary  Stiff, 
Chairwoman,  in  Vinegar  Verse.  Westminster:  Printed  at  the  Signe  of  the 
Alornes  in  Queen-Street,  neere  my  Lord  Fairfaxes  House,  and  are  to  be  sold  at 
the  Dildoc  in  Distaffe-'Ld.nt,  1650. 

2  "  The  charge  on  goods  being  so  great,  those  that  Trade  in  Wines,  Tobacco, 
Salt,  and  other  such  goods,  must  have  double  the  Stock  that  otherwise  their  Trade 
would  require.  .  .  .  The  Excise  of  Wine,  Salt,  Tobacco  and  all  Goods,  are  paid 
by  the  Importer,  who  often  trusteth  both  his  Stock,  disbursed  for  buying  the 
Goods  in  Forraign  Parts,  and  the  Customes  and  Excise  on  them,  and  looseth  all, 
both  principal  and  cost,  by  the  failing  or  inability  of  his  Creditor."  —  Trades 
Destruction  is  Englands  Ruine  or  Excise  decryed.  Wherein  is  manifested  the 
Irregularity  and  Inequality  of  raising  money  by  way  of  Excise  to  defray  the  Charge 
of  the  Nation.     By  W.  C,  a  Lover  of  his  Country.     London,  1659,  p.  6. 


Those  who  discuss  the  General  Excise         67 

crease  of  the  price  due  to  the  tax  restrict  the  market,  but  the 
height  of  the  tax  is  such  that  the  merchants  fear  to  add  the 
whole  amount  to  the  price,  thus  involving  them  in  a  double 
loss.^  Finally,  the  excise  leads  to  great  frauds  and  eva- 
sions, all  of  which  "much  spoileth  the  current  of  Trade."  ^ 
Hence  the  author,  after  exclaiming  :  "  take  notice  into  what 
desperate  poverty  the  late  Ruler  and  his  Confederates  have 
brought  the  Nation  by  imposing  burthens  on  Trade," '^  ad- 
jures his  countrymen  to  return  to  "the  good  old  way  and 
practice  of  our  Ancestors"  and  rely  for  revenue  upon  the 
property  tax.* 

During  the  seventeenth  century  these  isolated  sporadic  argu- 
ments had  little  weight.  The  doctrine,  however,  was  again 
put  forward  with  especial  emphasis  at  the  time  of  Walpole's 
excise  scheme  by  its  opponents,  who  were  desirous  of  mar- 
shalling every  possible  argument  against  the  plan. 

One  of  the  most  vehement  pamphleteers,  for  instance, 
objects  to  the  "  bondage  merchants  suffer,"  after  exposing 
themselves  to  the  dangers  of  the  sea,  and  after  paying  import 
duties,  "  by  not  being  permitted  to  deliver  their  Goods  after 
Sale  without  paying  an  imposed  Penalty  by  Way  of  Excise."  ^ 

^  "The  extraordinary  charge  of  goods  not  only  hindereth  the  expence  of  greater 
quantities,  in  regard  of  the  great  prizes;  but  also  often  enforceth  the  merchants 
to  sell  cheaper,  considering  the  charges  on  them,  then  otherwise  they  might 
do." —  Trades  Destruction,  etc.,  p.  7. 

"^  "Those  that  make  little  conscience  of  Oaths  or  lying,  that  have  little  Estates 
to  lose,  and  that  are  subtile  and  politick,  find  ways  to  save  the  Custome  and  Ex- 
cise, which  is  high,  and  so  sell  cheaper  than  those  that  are  able  and  plain  in 
dealing  can  do."  —  Ibid.  ^  Op.  cit.,  p.  8. 

■'■  During  the  Commonwealth  the  excise  laid  upon  imported  goods  was  admin- 
istered in  connection  with  the  customs.  The  complications  due  to  this  connec- 
tion led  to  a  wordy  warfare  which  is  reflected  in  three  pamphlets  of  the  year 
1653:  Quaeries  Touching  Reducement  of  the  Excise  to  the  Customes ;  Jeremiah 
Watts,  An  Answer  to  Quaeries  Touching  Reducement  of  the  Excise  to  the  Cus- 
tomes;  and  A  Whippe  for  the  Custome-house  Curre  or  a  Survey  of  Jeremiah 
Watts  his  scurrilous  Pamphlet. 

^  Excise  anatomi^d.  Declaring  that  unequal  Imposition  of  Excise  to  be  the 
only  Cause  of  the  Ruin  of  Trade,  the  universal  Impoverishment,  and  destructive 
to  the  liberties  of  the  whole  Nation.  By  Z.  G.,  A  well-wisher  of  the  common 
good.      London,  1733,  p.  5. 


68  Shifting  and  Incidence  of  Taxation 

The  dealer,  he  contends,  is  thus  made  to  suffer  all  manner 
of  delay  and  inconvenience,  and  often  loses  the  chance  of  a 
sale.  He  discusses,  in  picturesque  language,  nine  objections 
to  the  excise,^  and  finds  that  it  errs  most  grievously  "  by  the 
disproportionableness  and  inequality  of  its  Imposition,  by 
laying  the  greatest  Weight  and  Burthen  on  the  Back  of 
Trade,  thereby  utterly  disheartening  the  most  ingenious 
and  industrious  Party."  ^  He  is  not  weary  of  speaking  of 
the  tax  as  "that  detestable  and  so  often  damned  Imposition 
of  Excise."  ^  The  vehemence  of  the  writer's  language  in 
describing  the  nine  inequalities  of  the  excise  is  paralleled  in 
English  literature  only  by  the  author  (who  signs  himself 
Thrasybulus)  of  a  much  later  work  which  paints  in  lurid 
colors  the  thirty-three  defects  of  the  excise.^ 

^  He  speaks  of  the  excisemen  as  those  "who  like  ravenous  wolves  (using  the 
Law  of  Excise  for  their  Sheep's  Cloathing)  will  not  satisfy  their  insatiable  Appe- 
tites with  less  than  the  greater  Part  (of  the  merchants'  property)."  —  Excise 
auatomi^d,  p.  6.  He  speaks  of  other  officials  as  "  those  deformed  Monsters  of 
this  Age,  cloak'd  with  the  Name  of  Farmers  of  the  Excise,  whose  insolent  Vile- 
ness,  and  exhausting  Oppressions,  transcends  all  former  Ages."  —  Ibid.,  p.  9. 

'■'■Ibid.,  p.  4.  "The  Merchant  and  Trader,"  he  adds  elsewhere,  "  stands  in  as 
much  Fear  of  the  Excise-Man,  as  the  Welsh  Traveller  did  of  his  Host,  when 
being  at  Supper,  and  finding  amongst  his  Eggs,  one  with  a  chick  in  it,  hastily 
supp'd  it  up,  for  fear,  lest  his  Host  seeing  it,  might  make  him  pay  a  Groat  for 
it."  —  Ibid.,  p.  9. 

^ Ibid.  p.  19.  As  its  consequence  "all  our  former  flourishing  Tranquility  is 
become  a  Skeleton  of  Dry  Bones."  —  p.  11.  Much  the  same  point  of  view  is 
represented  in  .4  Letter  to  the  Merchants  and  Tradesmen  of  Great  Britain,  par- 
ticularly to  those  of  Lo7idon  and  Bristol,  upon  their  late  glorious  Behaviour  and 
Happy  Success  in  opposing  the  extension  of  the  Excise- Laws,  with  a  few  Seasona- 
ble Cautiotts  a7id  soniething  More,  which  it  is  hoped  will  be  agreeable  to  every  true 
Englishman.  By  Eustace  Budgell,  Esq.  London,  1733.  The  same  is  true  of 
Remarks  upon  a  Pamphlet  entitled  Considerations  occasioned  by  the  Craftsman 
upon  Excise.     London,  1733. 

*  Cf.  Six  Letters  on  Excise,  and  particularly  on  the  Act  passed  in  iy8g,for 
subjecting  the  Manufactures  of  and  Dealers  in  Tobacco  and  Snuff  to  the  Laws  of 
Excise.  London,  1790.  From  the  ninety-two  pages  of  invective  the  following 
may  be  quoted  as  samples,  although  no  attempt  is  here  made  to  reproduce  the 
reasoning.  The  proposition  for  the  excise  is  "dangerous,  oppressive  and  uncon- 
stitutional," "alarming,"  "subversive  of  freedom,"  "fraught  with  impolicy," 
"  inconsistent  with  political  wisdom  and  equity,"  "  pregnant  with  danger," 
"  replete  with  blindest  folly  and  indiscretion,"  "  of  essential  injury  to  piety  and 


Those  who  discuss  the  General  Excise  69 

Another  controversialist,  Amhurst,  who  writes  under  the 
pseudonym  of  D'Anvers,  tried  to  cover  two  positions.  He 
did  not  deny  that  excises  were  shifted  to  the  consumer,  but 
he  contended  that  they  hurt  the  trader  as  well.  "  Will  this 
Gentleman  pretend,"  he  said,  referring  to  an  opponent,  "  that 
Taxes  bring  no  Burthen,  no  Difficulty  or  Loss  upon  the  Tra- 
der, by  taking  the  Money  immediately  out  of  his  Pocket,  which 
He  could  otherwise  emply  to  great  Advantage,  and  giving  a 
Check  to  the  Circulation  of  his  Trade."  ^  Amhurst  laid  down 
his  general  conclusion  in  the  words  "Taxes  on  Trade  have 
already  deprived  us  of  some  valuable  Branches  of  it."  ^ 

It  may  be  queried,  however,  whether  Amhurst  really 
meant  anything  more  than  that  taxes  on  trade  are  frequently 
injurious  to  the  general  interests  of  commerce  —  an  opinion, 
common  enough  in  the  writings  of  the  seventeenth  century, 
which  can  be  found  well  expressed  in  the  celebrated  work  of 
Lewes  Roberts.'^  But  the  more  precise  question  as  to  the 
exact  incidence  of  taxes  on  trade  was  more  fully  discussed  in 

religion,"  "perpetually  inimical  to  happiness,"  "a  glaring  violation  of  sacred 
principles,"  "  impervious  in  its  spirit  and  troublesome  in  its  operation,"  "  con- 
spicuous for  inhumanity,"  "  a  source  of  great  mortification  and  irretrievable 
disadvantage,"  "an  unparalleled  oppression,"  "unjustly  rigorous  and  meanly 
ensnaring,"  "  in  an  eminent  degree  ridiculous  and  contemptible,"  "  totally  in- 
admissible," "precipitate  and  unnecessary,"  "utterly  inexpedient,"  "fundament- 
ally improper,"  "  in  no  measure  adequate  to  the  end  proposed,"  "  rash  and 
impolitic,"  "  essentially  hostile  to  the  fair  trade,"  and  "  permanently  disadvanta- 
geous to  the  revenue."     See  esp.  pp.  1-22. 

^  He  adds :  "  It  is  the  Plenty,  or  Scarcity  of  any  Commodity,  in  Proportion 
to  its  Vent  and  Demand,  which  must  always  rule  in  these  Cases,  and  by  which 
the  Trader  will  make  more  or  less  Profit  in  his  Dealings."  —  1  he  Second  Part  of 
an  Argument  against  Excises;  in  ans-uer  to  the  Objections  of  sroeral  Writers. 
By  Caleb  D'Anvers  [Lord  Nicholas  Amhurst].     London,  1733,  p.  19. 

2  Ibid.,  p.  20.     See  also  p.  41. 

^  "  When  the  customes  upon  Merchants  goods  is  small,  it  easily  draweth  all 
nations  to  trade  with  them  ;  and  contrariwise,  where  great  impositions  are  laid 
upon  Merchants  goods  the  traffike  of  the  place,  will  be  seen  scone  to  decay,  to 
the  prejudice  of  that  place  and  Kingdom."  —  The  Treasure  of  Traffike,  or  a  Dis- 
course of  Forraigne  Trade.  Wherein  is  shelved  the  benefit  and  commoditie  aris- 
ing to  a  Common-  Wealth  or  Kingdome,  by  the  Skilfull  Merchant,  and  by  a  well 
ordered  Commerce  and  regular  Traffike.  By  Lewes  Roberts,  Merchant  and  Cap- 
taine  of  the  City  of  London.     London,  1641,  p.  61. 


70  Shifting  and  Incidence  of  Taxatio7i 

connection  with  the  duties  laid  on  colonial  sugar.  It  may  be 
interesting  to  mention  a  few  of  these  writers,  all  of  whom 
maintain  that  the  tax  rests  on  the  seller  or  sugar-planter. 

The  clear-headed  author  of  one  seventeenth-century  tract 
declares  the  assertion  that  the  new  sugar  duty  will  be  paid  by 
the  buyer  "  a  meer  Mockery."  For,  "  if  an  Impost  be  laid 
upon  the  Sugar,  whoever  pays  it  the  Planter  is  sure  to  bear 
it.  What  avails  it  though  the  Buyer  pays  the  Duty,  if  the 
Seller  must  presently  allow  it  in  the  Price."  ^  Where  the  price 
of  the  article  is  practically  fixed,  he  adds,  as  in  the  case  of 
beer,  the  brewer  can  easily  add  the  tax  to  the  price.  But 
where  "  the  Price  is  uncertain,  and  a  Bargain  is  to  be  driven, 
and  a  Duty  yet  to  be  paid,"  the  matter  is  very  different.  For 
competition  will  compel  the  seller  to  take  less.^  The  general 
principle,  he  thinks,  can  be  put  as  follows  :  "  'Tis  not  Imposi- 
tions, but  Plenty  and  Scarcity,  that  rules  the  Market.  And  it 
is  found  by  constant  Experience,  that  where  an  Impost  is  laid 
upon  a  Commodity  in  demand,  there  the  Buyer  may  be 
brought  to  bear  some  part  of  it.  But  if  the  Market  be  glutted, 
and  the  Commodity  be  a  Drug  (as  Ours  is,  and  for  ever  will 
be) ;  in  this  case  the  Buyer  will  bear  no  part  of  the  Duty,  but 
the  Seller  must  pay  it  all."  ^ 

In  the  fifth  decade  of  the  eighteenth  century,  the  project 
of  a  new  duty  on  sugar  led  to  a  reconsideration  of  the  ques- 
tion.*     A  number  of  writers  now  contended  that  the  sugar 

'  The  Groans  of  the  Plantatioyis :  or,  a  true  Account  of  their  Grievous  and 
Extreme  Sufferings  by  the  Heavy  Impositions  upon  Sugar,  and  other  Hardships, 
etc.     London,  1689,  p.  9.     This  was  reprinted  in  1698. 

2  "  'Tis  not  the  Appointment  of  Law,  but  the  Agreement  of  the  Parties  that 
must  decide  the  question.  In  our  Case  the  Buyer  will  naturally  be  at  this  lock : 
If  you  clear  the  Duty,  I  will  give  you  so  much  for  a  Hundred  of  your  White 
Sugar ;  if  I  must  pay  it  you  must  have  seven  Shillings  less.  Which  is  as  broad 
as  long.  .  .  .  The  Buyer,  they  say,  must  pay  the  Duty,  but  sure  the  Seller  may  pay 
it  if  he  please.  And  he  will  please  to  pay  it,  rather  then  not  sell  his  Sugar,  If 
He  will  not,  there  are  enow  beside  that  will."  —  Ibid.,  p.  9. 

8  Ibid.,  p.  10. 

*  The  depressed  conditions  of  the  sugar  colonies  was  advanced  as  early  as  1736 
by  Walpole  as  a  reason  for  opposing  the  increased  taxation  of  spirituous  liquors. 
See  A  Letter  from  a  Member  of  Parliament  to  his  Friend  in  the  Country  contain' 


Those  who  discuss  the  General  Excise  71 

duty  would  be  borne  by  the  seller.  To  the  extent  that  the 
seller  happened  to  be  the  planter,  the  theory  would  be  equiv- 
alent to  the  one  discussed  in  the  last  section  —  the  theory, 
namely,  that  the  landowner  would  bear  the  burden.  For  in 
this  case  the  sugar  planter  would  be  at  once  the  landowner  and 
the  trader.  Thus  one  pamphlet,  written  to  prove  that  the 
duty  rests  on  the  sugar-planter,  argues  that  the  important  con- 
sideration is  the  possible  restriction  of  the  supply.  "  Every 
one  admits,"  says  the  author,  "that  Quantity  and  Vent  give 
a  Price  to  any  Commodity ;  it  is  therefore  to  be  considered 
in  what  Cases  the  Quantity  can  be  commanded  or  ascer- 
tained, in  proportion  to  the  Vent,  and  in  what  Cases  it  can- 
not ;  for  where  it  can,  the  Duties  will  lie  on  the  Consumer ; 
but  where  it  cannot,  it  will  evidently  lie  on  the  Producer  or 
Maker  as  often  as  the  Quantity  exceeds  the  Vent."  ^  He 
then  proceeds  to  show  by  specific  figures  that  in  the  case  of 
sugar  the  latter  is  true.  ^  Another  writer  on  the  same  subject 
lays  down  the  general  principle  in  similar  language ;  ^  and 
John  Ashley,  who  comes  to  a  like  conclusion,  states  that 
"  Experience  hath  shewn,  that  all  Duties  laid  upon  Sugar 
affects  the  Producer  more  than  the  Consumer."  *     One  of 

ing  his  Reasons  for  being  against  the  late  act  for  preventing  the  Retail  of 
Spirituous  Liquors,  etc.,  etc.  London,  n.  d.  [1736].  [By  Sir  Robert  Walpolc] 
See  esp.  pp,  20,  21. 

^  The  Axe  {once  more)  Laid  to  the  Root  of  the  Tree.  Published  for  the  uni- 
versal Benefit  of  Afankind  and  dedicated  to  the  Landholders  of  the  British  Domin- 
ions. By  a  Friend  of  Truth  and  the  Christian  Religion.  London,  1743,  pp.  1-2 
of  A  Supplement  on  Taxes  in  General  on  British  Sugar. 

2  Lbid.,  pp.  9  and  21  of  the  Supplement. 

8  "The  Seller  of  a  necessary  Commodity  can  oblige  the  Buyer  to  pay  it's 
Taxes,  in  case  the  Quantity  at  Market  is  only  equal  to  the  Vent  or  Demand. 
On  the  contrary,  when  the  Quantity  at  Market  much  exceeds  the  Vent  or 
Demand,  this  is  absolutely  out  of  the  Seller's  Power;  for  the  Plenty  will  influ- 
ence, and  keep  down  the  Price,  in  spite  of  his  utmost  Endeavours."  —  Considera- 
tions against  laying  any  New  Duty  upon  Sugar,  wherein  is  particularly  shetvn. 
That  a  New  Imposition  will  be  ruinous  to  the  Sugar  Colonics.  London,  1744, 
p.   7. 

■•  The  Second  Part  of  Memoirs  and  Considerations  concerning  the  Trade  and 
Revenues  of  the  British  Colonies  in  America.  By  John  Ashley,  Ksfj.  Londim, 
1743,  p.  79.     Ashley  had  a  decade  earlier  made  an  earnest  plea  for  putting  sugar 


72  Shifting  and  Incidence  of  Taxation 

the  last  of  the  pamphleteers  on  this  topic  discusses  the  state- 
ment that  the  taxes  will  be  shifted  to  the  consumer,  but 
urges  in  opposition  that  the  price  of  sugar  fluctuates  accord- 
ing to  the  quantity  imported  into  the  marts  of  Europe,  with- 
out reference  to  taxes  imposed  at  any  particular  place.^ 
Since  it  is  far  more  difficult  in  the  case  of  sugar  than  in  that 
of  other  commodities  to  apportion  the  supply  to  the  demand, 
he  thinks  the  net  result  will  be  that  the  taxes  will  ultimately 
fall  on  the  planter.^ 

Finally,  another  writer  of  the  same  year  takes  the  ground 
that  the  absence  of  any  foreign  market  combined  with  the 
glut  in  the  British  market  necessarily  causes  the  producer  to 
bear  the  burden  of  the  tax.^ 


into  the  list  of  non-enumerated  commodities,  and  thus  permitting  its  exportation 
to  a  wider  market.  His  table  of  charges  resting  on  the  planter  is  detailed  and 
interesting.  See  The  Sugar  Trade,  with  the  Jncut>ibrances  thereon  laid  open. 
By  a  Barbadoes  Planter  [John  Ashley].  London,  1734,  esp.  opposite  pp.  4  and 
7.  Cf.  also  his  Some  Observations  on  a  direct  Importation  of  Sugar  fro>n  the 
British  Islands.     London,  1735. 

1  "  Thus  it  appears  that  the  Price  of  Sugar  fluctuates  according  to  the  Quan- 
tity imported  into  Europe,  without  any  regard  to  any  advanced  Duties."  —  The 
State  of  the  Sugar  Trade;  shewing  the  Dangerous  Consequences  that  must  attend 
any  additional  Duty  thereon.     London,  1747,  p.  4. 

■2  "Nor  can  the  Quantity  be  proportioned  or  ascertain'd  according  to  the 
Demand,  as  in  the  Case  of  many  other  Commodities,  from  the  great  Charge  in 
settling  a  Sugar- I'lantation,  the  long  growth  of  the  Sugar  Cane,  the  uncertain 
Produce,  and  many  other  Reasons." —  The  State  of  the  Sugar  Trade,  pp.  4,  6. 
Cf.  p.  16.  A  similar  argument  may  be  found  in  Reasons,  grounded  on  Facts, 
shewing  that  a  neiu  Duty  on  Sugar  must  fall  on  the  Planter,  and  that  a  new  Duty 
will  not  certainly  encrease  the  Revenue.  London,  1748.  The  same  point  is  made 
in  Occasional  Remarks  upon  the  Act  for  laying  a  Duty  upon  the  Retalers  of  Spirit- 
tious  Liquors,  etc.,  and  for  Licensing  the  Retalers  thereof.     London,  1736,  p.  6. 

^  "While  there  is  a  surplus  Quantity  at  our  own  Market,  and  no  foreign 
Market  to  go  to  where  our  Sugars  can  find  a  Vent  at  a  living  Price,  the  Planter 
will  never  be  able  to  repay  himself  the  Duty  by  raising  the  Price,  which  will 
always  absolutely  depend  upon  the  Plenty  or  Scarcity  at  Market  in  Proportion  to 
the  Demand  or  Consumption." — Considerations  relating  to  the  laying  any  addi- 
tional Duty  on  Sugar  from  the  British  Plantations,  wherein  is  shewn  that  such 
Duty  will  be  injurious  to  the  Commerce  and  Navigation  of  this  Kingdom,  ruinous 
to  our  Sugar  Colonies,  beneficial  to  those  of  France,  and  insufficient  for  the  Pur- 
poses intended.     London,  1747,  esp.  pp.  9-13. 


Those  who  discuss  the  General  Excise  73 

The  same  question  of  the  incidence  of  the  tax  on  sugar 
came  up  again  at  the  time  of  the  American  Revolution. 
From  among  the  many  disputants  on  the  subject  we  shall 
select  only  one  particularly  vigorous  writer  who  claims  that 
the  pressure  of  the  tax  must  rest  in  whole  or  in  part  on  the 
planter.  "  There  is  no  problem  in  Euclid,"  says  our  author, 
"  clearer  than  that  increasing  the  price  of  sugar  by  taxes 
must  diminish  the  consumption  of  it ;  —  that  if  the  consumption 
decreases,  the  price  must  fall ; — and  that  if  the  price  falls  below 
a  certain  point,  the  burthen  of  the  tax  which  has  caused  that 
reduction  must  rest  upon  the  planter."  ^  Even  if  this  did  not 
happen,  he  thinks  that  the  planter  will  nevertheless  suffer  in 
common  with  those  who  do  not  pay  the  tax  as  well  as  those 
who  do.  "  If  it  were  possible  that  the  price  could  not  fall, 
but  was  fixed  by  act  of  Parliament  at  a  certain  invariable  rate 
per  cwt.,  still  the  planter  and  those  who  might  not  consume 
it,  as  well  as  those  who  do,  must  bear  a  proportion,  and  a  very 
considerable  proportion,  with  the  rest."^ 

Once  that  the  reasoning  as  to  the  effect  of  an  excise  had 
been  extended  to  this  class  of  duties  as  imports,  it  was  not 
long  before  it  was  apphed  to  other  taxes  on  commodities  as 
well.  Thus,  at  the  time  of  the  discussion  of  the  duty  on  silk 
it  was  occasionally  claimed  that  the  benefits  of  a  remission  of 
the  duty  would  accrue  to  the  planter  rather  than  to  the  con- 
sumer. But  there  were  not  lacking  writers  to  show  that  this 
was  very  unlikely,  and  that  the  conditions  of  the  market 
would  force  a  reduction  of  the  price.^      The  argument  as  to 

^  The  Case  and  Claim  of  the  American  Loyalists.     London,  1783,  p.  98. 

2  ''  For  the  price  of  no  one  article  of  consumption,"  he  adds,  "  that  can  be 
named,  can  be  advanced  much,  and  continue  so,  without  occasioning  a  propor- 
tionable rise  in  every  other  consumable  article.  In  the  latter  case,  the  planter 
bears  only  a  share,  but  in  the  former  the  whole  load  of  the  tax  besides  the  com- 
mon share  of  its  effects."  —  Of.  cit.,  p.  99. 

^  Thus  one  writer  claimed  that  the  foreign  planters  could  not  raise  prices  be- 
cause "their  necessity  for  the  Sale  of  their  annual  Produce  is  at  least  as  great ; 
nay,  I  will  venture  to  say,  much  greater,  than  our  Necessity  for  buying  the  Silk, 
because  Sujiplies  from  other  Parts  contribute  very  much  to  the  Want  of  our 
Manufactury."  —  Considerations  relative  to  a  Bill  under  the   Consideration  of  a 


74  Shifting  and  Incidence  of  Taxation 

the  non-shifting  of  the  tax,  however,  continued  to  find  its  ad- 
vocates, and  was  soon  extended  to  other  taxes  as  well,  such 
as  the  tax  on  receipts  and  the  shop  tax.  One  writer,  e.g.,  de- 
clares that  "  nothing  can  be  more  demonstrative  of  the  de- 
ficiency of  national  knowledge  in  the  landed  gentry  of  the 
present  time  than  their  almost  universal  supposition  and 
belief  that  in  whatever  mode  taxes  be  laid  upon  trade,  or  upon 
the  conduct  of  trade,  traders  can  always  lay  them  upon  the 
commodities  taxed,  and  that  ultimately  they  always  fall  upon 
the  consumers."^  It  is  indeed  true,  says  our  author,  that 
prices  may  rise,  but  that  will  come  only  as  the  result  of  a 
scarcity  produced  by  the  ruin  of  the  producers.  "  The  de- 
struction of  trade  and  the  ruin  of  numbers  are  necessary  pre- 
liminaries to  the  accomplishment  of  this  precious  tax."  ^ 

Another  writer  who  opposes  the  tax  on  receipts  and  who 
concedes  that  taxes  on  trade  will  fall  on  the  consumer, 
asks:  "But  through  what  intermediate  progression  will  that 
occur .-" "  and  answers :  "  When  taxes  are  above  their  full 
height  on  trade,   by  the  most  destructive  imaginable.''  ^     He 

Committee  of  the  House  of  Coinmons  for  taking  off  the  Duty  on  all  Raw  Silk  of 
every  Denomination,  that  shall  be  imported  into  Great  Britain.  Humbly  offered 
to  the  Right  Hon.  Charles  Townsend.     London,  n.  d.,  p.  35. 

^  "  For,"  says  he,  "  the  value  of  all  commodities  depends  upon  the  markets.  If 
they  be  full,  they  will  be  cheap  ;  if  they  be  empty,  they  will  be  dear.  ...  So  that, 
as  to  price,  little  or  nothing  depends  on  the  will  of  the  trader :  he  must  be  con- 
trouled  by  the  markets."  — A  Second  Letter  of  Advice  addressed  to  all  Merchants, 
Manufacturers  and  Traders  of  every  dettomination  in  Great  Britain  concern- 
ing the  odious  and  alarming  Tax  on  Receipts,  in  which  their  Fears  and /ealottsies 
of  future  Alterations  of  the  Act,  with  intent  to  force  it  upon  them,  by  Ministry  are 
considered,  etc.,  etc.  By  Oliver  Quid,  Tobacconist.  2d  ed.  London,  1783, 
p.  15.  Quid's  first  Letter  of  Advice,  published  shortly  before,  ran  through  six 
editions  in  the  year. 

2  Op.  cit.,  p.  16. —  The  first  suggestion  of  a  tax  on  receipts,  so  far  as  I  am 
aware,  is  contained  in  Some  Thoughts  on  the  Interest  of  England,  etc.,  etc.  By  a 
Lover  of  Commerce.  London,  1697.  The  author  couples  this  suggestion  with  a 
scheme  to  make  the  public  take  the  Bank  of  England  notes. 

^  A  Serious  Address  to  the  Public  concerning  the  Tax  on  Receipts  :  with  a  fno 
observations  on  the  present  critical  and  very  alarming  Situation  of  this  Country 
with  regard  to  Trade,  Revenues,  National  Debt,  and  Principles  of  Government. 
London,  1784,  p.  25. 


Those  wlw  discuss  the  General  Excise  75 

chooses  as  an  illustration  the  import  tax  on  sugar.  The 
duty  is  paid  in  first  instance  by  the  merchant  and  charged  to 
the  planter.  There  can,  however,  be  no  increase  of  price 
without  an  alteration  in  the  supply.  The  producer  will,  ac- 
cordingly, restrict  his  output  and  raise  the  price  to  a  paying 
basis,^  "  but  ere  that  can  be  accomplished,  the  tax  follows  and 
oppresses  him  all  the  way."  To  the  extent  that  he  reduces 
his  output,  he  diminishes  the  employment  of  "implements, 
shipping,  seamen,  refining  at  home,  etc.,"  so  that  the  king- 
dom is  "  deprived  of  so  much  trade  and  all  its  concomitant 
appendages."  Furthermore,  when  the  price  is  raised,  the 
consumers  themselves  will  decrease,  "  and  so  the  quantity  of 
trade  will  be  still  farther  lessened."  Finally,  the  new  tax 
will  increase  smuggling.^ 

Taxes,  therefore,  fall  upon  the  consumer  only  "  by  a  par- 
tial destruction  of  the  trade  itself,  and  great  intermediate  mis- 
chief to  the  principal  and  ruin  to  the  poorer  manufacturers 
and  dealers."  "This  reasoning,"  he  concludes,  "applied  to 
all  important  things  in  trade,  will  be  found,  we  trust,  univer- 
sally true."'^  Its  truth,  at  all  events,  was  accepted  by  an  op- 
ponent of  the  shop  tax,  who  contended  that  "  it  is  unneces- 
sary to  argue,  in  supposititious  cases,  the  impossibility  of 
charging  the  shop-tax  to  the  public."  "  For,"  said  he,  "  Time 
has  given  a  sanction,  as  it  ever  does,  to  Truth  :  There  is  not  a 
Consumer  to  be  found,  who  will  openly  come  forward  to  avow 
he  has  paid  the  Shop-Tax  in  the  Price  of  the  Articles  he  has 
purchased."* 


^  "If  the  duties  be  so  high  as  not  to  pay  him  at  a  full  market,  and  a  cheap 
price,  he  will  necessarily  make  less  and  less,  till  he  cause  a  thin  market  and  rniic 
the  price  to  what  will  pay  him." — A  Serious  Address  to  the  rublic,  concerning  the 
Tax  on  Receipts,  etc. ,  p.  28. 

'■^  The  ecjuivalent  of  smuggling  is,  in  the  case  of  the  tax  on  receipts,  the  use  of 
forged  stamps.  0/>.  cit.,  p.  22.  This  point  was  emphasized  in  A  capita/  Mistake 
of  the  Legislature  respecting  the  Tax  on  Receipts.     London,  1784. 

^  A  Serious  Address,  etc.,  pp.  28-29. 

*  .1  Letter  to  the  Minority  in  the  House  of  Commons,  who  voted  on  the  J4th 
April,  ijSj,  in  Favour  of  a  Motion  for  the  Repeal  of  the  Shop  Tax.  London, 
1787,  p.  5. 


76  Shifting  and  Incidence  of  Taxation 

Reviewing  the  authors  treated  in  this  chapter,  we  see  that 
whatever  the  theories  as  to  the  incidence  of  the  excise  might 
be,  each  set  of  objectors  emphasized  his  particular  ground  of 
opposition.  Not  infrequently  an  attempt  was  made  to  com- 
bine various  and  partly  inconsistent  theories  in  order  to  show 
the  defects  of  the  system.^  The  chief  objection  to  the  excise, 
however,  was  the  inquisitorial  character  of  the  tax.  By  the 
beginning  of  the  eighteenth  century  this  had  become  in- 
grained into  the  people,^  and  the  mere  word  excise  was 
enough  to  inflame  the  popular  mind. 

The  prejudice  against  this  form  of  taxation  spread  from 
England  to  the  American  colonies,  and  the  projects  to  estab- 
lish an  excise  at  various  times  met  with  vociferous  opposi- 
tion. Thus  when  the  plan  was  seriously  discussed  in  Massa- 
chusetts in  the  middle  of  the  eighteenth  century,  Dr.  Samuel 
Cooper  spoke  of  it  as  "  this  detestable  scheme  "  and  "  this 
destroying  corroder,"  ^  and  maintained  that  "none  under  this 
odious  CEconomy  will  undertake  such  a  Jobb  [as  Collectors 


^  So,  e.g.,  the  pamphlet  entitled:  The  Mischief  of  the  Five  Shillings  Tax  upon 
Coal,  is  Here  humbly  Represented,  That  this  Tax  is  Inconsistent  with  the  Safety 
of  England,  Partial  upon  the  Poor,  Pernicious  to  our  Shipping,  and  Seamen, 
Destructive  of  our  River-Men,  viz.  Boat-Men,  Keel- Men,  Barge-Men,  Ballast- 
Men,  Coal-heavers,  &^<r.  Fatal  to  our  Manufactures  made  with  Sea- Coal ;  es- 
pecially Salt,  Glass,  and  all  sorts  of  Gross  Ironwork  ;  (^that  by  this  Tax  must  be 
Run  into  the  Coal  Countries,  or  out  of  the  Kingdom,)  and  highly  Injurious  to  His 
Majesties  Revenue.     London,  1699. 

^  C/;  as  a  type  of  the  popular  opinions  on  the  subject  the  following  passage  : 
"It  would  be  a  History  too  long  for  any  Man's  Reading  to  set  down  all 
the  barbarous  Treatment  the  Queen's  Subjects  daily  meet  from  the  Gentlemen 
Excisemen  ;  their  Arbitrary  Judgments,  Clandestine,  and  most  Villanous  Methods 
of  surprizing  the  Innocent  and  their  partial  and  positive  determining  Things 
against  Law,  Reason  and  apparent  Testimony  of  Fact."  —  Remarks  on  the  Horri- 
ble Oppressions,  Insolencies  and  Unjustifiable  Partialities  of  the  Commissioners  of 
the  Excise,  with  some  Historical  Collections  of  Matter  of  Fact,  p.  59.  London, 
1706.  The  Excisemen  are  characterized  as  "a  Sett  of  Men  who  have  hitherto 
lived  upon  the  Blood  of  Families,  and  rejoyc'd  over  the  Calamities  of  those  they 
have  most  unjustly  and  barbarously  ruin'd."     Ibid.,  p.  50. 

^  The  Crisis.  [By  Dr.  Samuel  Cooper.]  n.p.  [Boston],  1754,  pp.  3,4.  "No 
man,"  he  adds,  "  in  the  Exercise  of  common  Sense  can  deny  that  the  Extension 
of  the  E — e  A — t  will  deprive  us  of  a  Part  of  our  Liberty." 


Those  who  discuss  the  General  Excise  yy 

of  Excise]  but  men  of  the  most  contemptible  and  abandoned 
Character."^  A  generation  later  a  writer  in  New  York  re- 
ferred to  the  excise  system  of  a  neighboring  state  as  a 
"shameful  species  of  slavery."^ 

The  opposition  reached  its  cUmax,  however,  a  few  years 
later  in  an  impassioned  outcry  against  the  federal  taxes  on 
sugar  and  snuff,  in  a  work  which  bears  the  motto  :  "  The 
horror  of  all  free  states,"  and  which  contains  the  following 
graphic  prediction  :  "  Were  some  future  congress  to  enforce, 
in  all  its  horrors,  a  Portuguese,  or  a  British  system  of  Excise, 
were  an  hundred  thousand  mercenaries  prepared  to  support 
it,  the  geographical  situation  of  this  continent  would,  in  a  few 
years,  defeat  the  plan.  The  western  shore  of  the  Mississippi 
would  afford  a  capacious  asylum,  and  an  impenetrable  ram- 
part to  millions  of  fugitives  from  the  Atlantic  states.  Excise 
would  yelp  in  solitude ;  while  new  nations  and  empires  of 
freedom  would  stretch  along  the  banks  of  the  Missouri."^ 

Summing  up  the  above  literature,  it  is  clear  that  the  dis- 
cussion of  the  excise  called  forth  almost  every  conceivable 
theory  as  to  its  incidence.  Some  thought  that  the  tax  was 
not  shifted  at  all,  some  maintained  that  it  was  shifted  to 
the  landowner,  some  believed  that  it  was  shifted  to  the  con- 
sumer, and  some  contended  that  it  was  again  shifted  by  these 

1  The  Crisis,  p.  8.  The  same  ideas  are  reflected  in  The  Monster  of  Monsters,  a 
true  and  faithful  Narrative  of  a  most  remarkable  Phenomenon, -which  lately  made 
its  Appearance  in  this  Metropolis  to  the  Surprize  and  Terror  of  all  his  Majesty's 
Gooa  Subjects.  Dedicated  to  all  the  Virtuosi  of  Nnv  England.  Boston,  1754. 
Slightly  more  moderate  is  the  tract  entitled  Some  Observations  on  the  Bill  iniitled 
an  Act  for  granting  to  his  Majesty  an  Excise  upon  Wines  and  Spirits  distilled, 
sold  by  Retail  or  consumed  within  this  Province,  and  upon  Limes,  Lemons  and 
Oranges.     Boston,  1754,  pp.  6  et  seq. 

^  "  It  is  astonishing  that  a  people  so  sagacious  as  those  of  Connecticut  should 
inflict  on  a  class  of  their  citizens  that  shameful  species  of  slavery,  the  Excise."  — 
Honesty  shelved  to  be  the  true  Policy  :  or  a  general  Impost  considered  and  defended. 
By  a  Plain  Politician.     New  York,  1786,  p.  17. 

'  A  Short  History  of  the  Nature  and  Consequences  of  Excise  Laws,  including 
some  Account  of  the  Recent  Interruption  to  the  Manufactories  of  Snuff  and  Refined 
Sugar.     Philadelphia,  1795,  p.  ill. 


yS  Shifting  and  Incidence  of  Taxation 

to  the  employers  of  labor.  These  views  were  advanced  with 
all  degrees  of  confidence  —  but,  with  few  exceptions,  with 
little  grasp  of  fundamental  economic  principles.^  Among  the 
assertions  and  proofs,  however,  we  have  found  here  and  there 
some  interesting  premonitions  of  modern  theories.  Although 
we  cannot  speak  of  any  unanimous  or  authoritative  doctrine, 
the  better  opinion,  as  we  have  seen,  and  the  one  which  grad- 
ually gained  an  ever-increasing  number  of  adherents,  was 
that  the  excise  tends  to  be  shifted  to  the  consumer,  and  that 
it  augments  the  burdens  resting  on  the  mass  of  the  laborers. 
In  this  way  scientific  opinion,  if  it  can  be  called  such,  grad- 
ually came  to  harmonize  with  the  popular  view. 

1  The  hollowness  of  many  of  the  objections  to  the  excise  scheme  alluded  to 
above  is  discussed  in  the  following  works  not  otherwise  referred  to  in  this  vol- 
ume :  Nath.  Polhill,  Reflections  on  the  present  Conduct  of  the  Populace  relating  to 
the  Government,  particularly  the  Prime  Minister;  and  the  late  Motion  for  a  new 
Excise.  London,  1733;  An  Examination  of  the  late  Conduct  of  the  Ministry 
■with  respect  to  the  Duties  on  Tobacco  and  Wine.  London,  1733;  Seasonable  Re- 
flections occasioned  by  the  Bills  expected  in  Parliament  relating  to  the  Duties  on 
Wines  and  Tobacco.  London,  n.  d.  (1733);  Remarks  upon  a  Pamphlet  en- 
titled Considerations  occasioned  by  the  Craftsman  upon  Excises.  London,  1733; 
and  Cautions  of  the  Maltsters,  Hop-Planters,  Brewers,  Distillers,  and  others  trad- 
ing in  Excised  Goods  or  Merchandize,  to  their  Brother  Electors  of  Members  to 
serve  in  the  next  Parliament  of  Great  Britain.     London,  1 734. 


CHAPTER   II 
Those  who  favor  a  Single  Tax  on  Luxuries 

As  we  have  already  seen,  confidence  in  the  general  excise, 
— in  the  sense  of  a  tax  on  the  producer  or  dealer, — which 
was  deemed  by  the  great  mass  of  writers  to  be  an  indirect 
tax  on  the  consumer,  gradually  weakened  during  the  eigh- 
teenth century.  Partly  because  it  was  no  longer  deemed 
equitable  that  the  poorer  consumers  should  bear  the  burden, 
partly  because  it  was  supposed  that  these  taxes  were  prejudi- 
cial to  trade,  the  idea  of  an  indirect  tax  on  consumption  in 
general  was  now  replaced  by  that  of  a  direct  tax  on  certain 
particular  kinds  of  expenditure.  Instead  of  levying  a  tax  in 
first  instance  on  the  producer  or  dealer,  it  was  now  proposed 
to  lay  one  directly  on  the  consumer;  and  instead  of  making 
the  general  consumer  bear  the  burden,  it  was  planned  to  tax 
only  the  purchaser  of  certain  luxuries.  In  short,  in  lieu  of 
an  indirect  tax  on  necessaries,  we  now  meet  with  the  scheme 
of  a  direct  tax  on  luxuries. 

The  earliest  inkling  of  such  a  plan  is  probably  to  be  found 
in  a  seventeenth-century  work  of  Chambcrlayne.  This  writer 
gives  all  the  details  of  a  scheme  which  he  sums  up  in  the  prop- 
osition that  "upon  all  such  Commodities  as  occasion  either 
Excess  or  Luxury,  Wantonness,  Idleness,  Pride  or  Corruption 
of  Manners  there  may  be  laid  a  large  and  extraordinary  Im- 
post."^ But  from  his  reference  to  "the  practice  of  neigh- 
bour Nations"  it  is  not  quite  certain  whether  Chambcrlayne 
is  here  speaking  of  a  direct  or  an  indirect  tax  on  luxuries. 
This  doubt,  however,  does  not  exist  in  the  case  of  another 

^  Englands  Wants  or  sevrral  Proposals  probably  Beneficial  for  England,  hum- 
bly offered  to  the  Consideration  of  all  good  Patriots  in  both  houses  of  Parliament. 
By  a  true  Lover  of  his  Country.     [Edward  Chaniherlayne.]     London,  1667,  p.  4. 

79 


8o  Shifting  and  Incidence  of  Taxation 

writer,  toward  the  end  of  the  century,  who  was  careful  to 
recommend  taxes  on  commodities  "payable  by  the  Buyer" 
or  "  Consumptioner."  ^  That  he  refers  to  luxuries  appears 
clearly  from  his  statement  that,  according  to  the  scheme  as 
elaborated  in  the  monograph,  "all  Persons  Tax  themselves 
according  to  such  Degrees  as  their  Extravagancies  shall 
prompt  to  exceed  the  Decent  and  Necessary  Uses  of  them." 
The  author  discusses  the  objection  that,  as  the  purchaser 
is  apt  to  be  overreached  anyway,  the  tax  ought  to  be  paid 
by  the  "seller  who  gets  prophet."  ^  His  reply  is  threefold: 
first,  if  the  goods  are  not  sold,  the  dealer  pays  nothing  ; 
second,  the  seller  is  under  no  temptation  to  increase  the  price 
by  more  than  the  tax;  third,  there  is  less  chance  of  evasion.^ 
The  tax,  he  concludes,  rests  where  it  is  imposed,  and  cannot 
be  shifted. 

During  the  ensuing  decades  the  same  idea  was  taken  up 
by  other  writers.  Parker,  for  instance,  suggests  a  general 
tax  on  commodities  consumed,  to  take  the  place  of  all  other 
taxes.  As  compared  especially  with  the  general  property  or 
land  tax,  Parker  contends  that  whereas  the  land  tax  is 
grossly  unequal  and  only  spasmodically  assessed,  the  new 
tax  will  compel  individuals  to  pay  in  accordance  with  their 
abilities,  and  will  fall  on  practically  everybody.^ 

*  To  the  Honourable  the  Knights,  Citizens,  and  Burgesses  of  the  House  of  Com- 
mons in  Parliament  assembled.  Proposals  most  humbly  offered  for  Raising  {in  all 
Likelyhood)  upwards  of  Five  Millions  of  Money,  without  Charging  the  Poor,  or 
Burthening  the  Rich,  by  such  Ways  and  Means,  that  {for  the  greatest  part  thereof) 
the  Payers  will  voluntarily  Tax  themselves.     [By  J.  M.]     London,  1696,  p.  i. 

2 "It  may  probably  be  objected,  that  'twill  be  hard  on  the  Buyer,  who  parts 
with  his  Money  for  anything  herein  named,  to  pay  the  Tax,  when  perhaps  he 
may  be  out-reach'd  in  the  price  ;  therefore  more  reasonable  to  be  paid  by  the 
seller  who  gets  prophet."  —  Ibid.,  pp.  4,  5. 

^"The  Answer  hereunto  is  Obvious,  if  Consider'd,  that  first,  none  will  be 
Burthen'd  with  Taxes  for  any  Commoditie,  that  lies  on  hand  dead  and  unsold: 
Secondly  the  seller  is  debarr'd  of  any  Just  pretensions  for  Inhancing  the  price 
thereof,  beyond  the  usual  Value  .  .  .  :  and  Lastly,  the  Tax  will  more  certainly  be 
pay'd,  for  no  seller  will  put  himself  at  the  Mercy  of  any  Informing  Buyer,  since 
it  comes  not  out  of  his,  but  the  Buyers  Pocket."  — Ibid.,  p.  5. 

4«  jPt  Because  the  Land-tax  was  always  uneqally  paid,  but  this  ['tax  on 
merchandise ']  cannot,  for  everyone  will  pay  according   to   their  Abilities   and 


Those  who  favor  a  Single   Tax  on  Luxuries     8i 

Another  writer  deduces  his  scheme  of  a  tax  on  luxuries 
from  the  doctrine  that  property  rather  than  expenditure  is 
the  real  test  of  justice  in  taxation.  "  The  received  Maxim  of 
Equality,"  he  tells  us,  "in  levying  any  Tax,  is  to  be  under- 
stood to  have  relation  only  to  the  Wealth  and  Riches  of  the 
Subject ;  and  therefore,  when  the  poorer  (always  the  labour- 
ing and  industrious)  Part  of  the  People  are  loaded  to 
the  utmost,  and  that  an  Aid  must  necessarily  be  raised  for  the 
common  Good,  then,  I  say,  the  Rich  alone  should  supply  the 
Wants  of  the  State."  ^  He  therefore  suggests  a  whole  series 
of  taxes  on  luxury,  like  jewels,  lace,  fine  fabrics,  periwigs, 
swords,  coaches,  and  beverages.  One  of  the  beneficial  results 
of  such  a  system,  our  author  thinks,  will  be  to  lessen  the 
demand  for,  and  therefore  the  remuneration  of,  the  laborers 
occupied  in  the  production  of  these  luxuries.  For  it  is  the 
high  wages  of  the  laborer  that  chiefly  stand  in  the  way  of 
England's  competing  on  favorable  terms  with  her  neighbors.^ 

Occasions  serve.  2l^  To  the  Land-tax  there  is  but  a  few  in  comparison  to  the 
whole  Nation  that  pay,  and  a  great  many  that  are  better  able  than  many  that  pay 
to  the  Land-tax  pays  nothing,  but  in  this  few  or  none  will  escape,  but  will  be 
sure  to  pay  something  yearly,  although  but  a  small  matter.''  —  Proposals  for  a 
very  Easie  Tax  to  raise  between  Two  and  Three  Millions  of  Money  per  Annum, 
{if  not  a  greater  Sum)  in  the  room  of  the  Land-Tax,  to  begin  to  pay  the  Puhlick 
Debts,  and  to  discharge  this  Nation  not  only  from  all  those  Taxes  that  these  Two 
late  expensive  Wars  have  loaded  Us  with,  but  from  all  other  Taxes  that  are  paid 
to  Her  Majesty,  in  a  few  years'  time,  with  other  happy  Consequences,  that  will 
accrue  to  the  Kingdom  in  general,  if  it  should  be  laid  on  and  continued.  Also 
Proposals  for  the  further  Encouraging  the  Woollen-Manufactures  of  tfiis  A'ing- 
dom  in  foreign  Parts.     [By  Ephraim  Parker.]     London,  1713,  p.  6. 

1  "  But  this,"  he  adds,  "  is  to  be  done  with  the  greatest  Gentleness  imaginable, 
and  if  possible,  as  it  would  be  a  means  to  engage  them  to  comply  with  the  greater 
Alacrity,  some  Compensation  should  be  made,  either  at  the  present,  or  in  Time 
to  come,  to  the  Contributors  to  such  an  Aid."  —  An  Essay  on  Ways  and  Means 
for  the  Advancement  of  Trade  and  for  paying  off  in  a  few  Years,  the  Debts  of  the 
Nation,  without  Laying  any  additional  Burden  on  Land.     London,  1 726,  p.  8. 

2  "Next  to  the  Acquittal  of  the  National  Debts,  there  is  nothing  can  promote 
Trade  so  much,  as  lowering  the  Price  of  Labour  amongst  us.  By  the  Exorbitancy 
of  our  Workmen,  we  have  it  not  in  our  Power  to  sell  our  Manufactures  at  foreign 
Markets  at  so  low  a  Rate,  as  we  were  wont,  and  for  this  Reason  alone,  we  have 
lost  many  valuable  Branches  of  Trade  which  our  Neighbours,  who  work  cheaper, 
have  taken  up."  —  Ibid.,  p.  44. 


82  Shifting  and  Incidence  of  Taxation 

In  order  to  accomplish  this  object  he  is  even  in  favor  of  a 
law  restricting  the  further  erection  of  buildings  in  London 
whereby  "  the  temptation  to  Luxury  will,  as  far  as  possible, 
be  taken  away  from  the  industrious  Part  of  the  Subject.^ 

This  attribution  of  the  decay  of  trade  to  high  wages  which 
has  been  referred  to  above  ^  in  another  connection,  was  a 
common  subject  of  discussion  with  the  writers  of  the  time. 
But  it  was  vigorously  opposed  a  little  later  by  another  parti- 
san of  the  taxation  of  luxuries.^  As  the  title  clearly  indicates 
it  is  not  in  the  high  wages  of  the  laborer,  but  in  the  extrava- 
gant profits  of  the  tradesman,  and  especially  in  the  luxurious 
habits  of  the  rich,  which  lead  to  an  undue  consumption  of 
"Articles  of  Foreign  Luxury,"  that  the  reason  of  the  decay 
of  trade  is  to  be  sought.*  The  author  advances  the  general 
principle  "  that  all  Taxes  should  be  laid  as  near  as  possible 
in  the  last  Instance,  and  upon  the  immediate  Consumer,  and 
in  proportion  only  to  what  he  consumes,  there  being  nothing 
more  unjust  or  absurd,  than  that  a  Man  should  pay  a  Tax  for 
what  he  does  not  consume."  ^  He  bases  his  conclusion  in 
favor  of  taxing  the  consumer,  rather  than  the  producer  or 
importer,  largely  on  the  argument  that  taxes  accumulate  with 
each  transfer,  and  "  consequently  draw  with  them,  through 
their  whole  Progress,  a  Profit  on  the  Tax,  as  well  as  upon 
their  first  value  or  prime  cost."^     Accordingly  he  proposes 

^  An  Essay  on  Ways  and  Means,  p.  46.  ^  Supra,  pp.  41-46. 

^  Proposals  for  carrying  on  the  War  with  Vigour,  raising  the  Supplies  within 
the  Year  and  forming  a  National  Militia.  To  which  are  added  Considerations 
in  Respect  to  Manufacturers  and  Labourers,  and  the  Taxes  paid  by  them;  the 
Inconveniences  of  Credit  for  small  Sums,  and  the  Courts  lately  erected  to  recover 
them.  Intended  to  demonstrate,  that  it  is  not  the  Dearness  of  the  Labour  of  the 
Poor,  but  the  Profits  atid  Expences  of  higher  Classes  of  People,  which  are  the  real 
Clog  on  the  Foreign  Trade  and  Commerce  of  England.     London,  1757. 

*  Op.  cit.,  pp.  52-54.  6  Op.  cit.,  p.  II. 

^  "The  value  of  the  Goods,  and  the  Tax  upon  them,  are  so  effectually  blended, 
that  they  pass  together  under  the  general  Name  of  the  Price,  upon  which  a  pro. 
portionable  Profit  is  expected  by  every  one  of  the  various  dealers,  through  whose 
Hands  they  pass  ;  and  then  by  a  repeated  Accumulation  of  Profits,  before  they 
can  be  purchased  by  the  Consumer,  the  Taxes  gradually  swell  to  such  an  Amount 
'  that  in  England  the  Exchequer  receives  only  about  one-half  of  what  is  taken 
from  the  taxpayer.'  " —  Op.  cit.,  p.  10. 


Those  who  favor  a  Single   Tax  on  Luxuries     83 

a  series  of  taxes  on  a  "  vast  variety  of  articles  that  may  be 
placed  in  the  List  of  unnecessary  Expenses  and  are  only  the 
Trappings  and  Gildings  of  modern  Vanity  and  fashionable 
Excess."  For  "the  stately  Cup  of  Luxury,  Riot  and  Extrav- 
agance are  full  to  the  very  Brim."^ 

Another  writer,  by  the  name  of  Downes,  who  was  equally 
insistent  on  laying  taxes  on  the  "  Superfluities  of  the  Rich, 
the  Proud  and  the  Extravagant,"  ^  advances  an  ingenious 
argument  designed  to  show  that  such  taxes  will  not  interfere 
with  trade.  A  tax  on  such  commodities,  he  thinks,  far  from 
diminishing  their  consumption,  will  really  increase  it,  for  the 
more  costly  such  articles,  the  more  will  their  possession  and 
display  be  sought  after  by  those  who  belong  to,  as  well  as 
those  who  seek  to  enter,  the  charmed  circle.^  "  Should  the 
Duty  on  the  'foregoing  Things  take  place,"  says  Downes, 
"  I  cannot  be  persuaded,  that  they  would  be  less  wore  than 

1  Op.  cit.,  pp.  31-32.  Among  these  imposts  is  included  a  tax  on  cards,  for 
"  Card-playing  is  a  Folly  which  pervades  all  Ranks,  Sexes  and  Ages,  creates  such 
a  Waste  of  Time,  leads  to  such  unthought-of,  as  well  as  unheeded  expences, 
occasions  such  violent  Alterations  in  our  Tempers,  interferes  so  much  with  every 
Kind  of  Business,  and  brings  with  it  such  an  inexpressible  Train  of  ill  Conse- 
quences" as  to  defy  description.  This  is  indeed  a  tax,  he  thinks,  which  "  every 
Person  of  a  sober  Understanding,  which  implies  his  not  being  infatuated  with 
this  fashionable  and  yet  foolish  Diversion  .  .  .  ,  will  heartily  give  his  consent  to." 
—  Ibid.,  pp.  28-29.  It  is  an  interesting  fact  that  in  this  writer  we  first  find  a  rec- 
ognition of  the  modern  theory  of  economics  that  capital  is  nothing  but  a  capitaliza- 
tion of  income.  Referring  to  the  fact  that  a  reduction  of  interest  on  government 
bonds  will  inevitably  produce  a  diminution  in  their  selling  price  he  says :  "  For 
it  is  a  Fact  which  cannot  be  questioned,  that  Multitudes  of  People  look  no  fur- 
ther than  the  Income,  and  annex,  in  their  own  Idea,  a  Value  to  that,  without  any 
Respect  had  to  the  Capital  .  .  .  nor  are  the  causes  of  their  running  away  with 
this  notion  at  all  difficult  to  discover." —  Op.  cit.,  p.  17. 

-  A  Scheme  plainly  demonstrating  how  several  Hundred  Thousand  Pounds 
may  be  raised  Yearly  to  the  Government  without  officers  to  collect  it,  'without 
oppression  to  the  Poor,  without  hurting  Trade  and  without  any  Person's  being 
obliged  to  pay  it,  but  when  he  pleases  so  to  do,  etc.  [By  Thomas  Downes  of  St. 
Albans.]     London,  1732,  p.  13. 

"  "  If  it  should  be  objected,  That  a  Tax  on  Superfluities  would  cramp  the 
Tradesman  and  Artificer;  I  think  I  may  venture  to  affirm  the  contrary  ;  for  Pride 
is  of  such  a  Nature,  that  it  will  be  gratified,  tho'  at  great  Expense.  .  .  .  Nay,  I 
am  almost  of  opinion,  that  a  Tax  on  Things  like  these  would  promote  the  Con- 
sumption of  them  in  this  Expensive  Age." —  Op.  cit.,  p.  14. 


84  Shifti7tg  and  Incidence  of  Taxation 

they  are ;  since,  if  I  know  any  thing  of  our  modern  Gentry, 
etc.,  they  would  be  more  afraid  to  be  seen  without  them, 
than  they  would  be  concern'd  about  the  Tax."  Downes 
also  favors  the  tax  on  the  consumer  rather  than  on  the 
producer  or  dealer,  for  the  same  reason  as  the  previous 
writer,  namely,  that  it  prevents  the  cumulative  rise  of  price, 
which,  however,  he  considers  illegitimate. ^  It  is  also  to  be 
noted  that  Downes  suggested  the  scheme  of  assessing  the 
tax  by  affixing  "  stamps  or  tokens  "  ^  to  the  commodities  —  a 
scheme  which  was  not  tried  until  the  government  of  the 
United  States,  more  than  a  century  and  a  quarter  later, 
adopted  it  with  great  success,  at  the  suggestion  of  Mr.  David 
A.  Wells,  in  its  internal  revenue  system. 

During  the  seventeenth  and  the  early  part  of  the  eigh- 
teenth century  these  isolated  proposals  met  with  little 
support.  It  was  not  until  shortly  before  the  middle  of  the 
eighteenth  century  that  the  doctrine  was  put  forward  in  so 
authoritative  a  manner  as  to  command  attention. 

The  plan  of  a  single  tax  on  luxuries  was  unfolded  in  an 
anonymous  work,^  the  authorship  of  which  is  doubtful  even 
to  this  day.  By  some  it  is  ascribed  to  Richardson,  by  others 
to  Decker,  with  the  probabilities  in   favor  of   the  former.* 

1  A  Scheme  plainly  demonstrating,  etc.,  p.  22. 

2  Op.  cit.,  pp.  15-18.  During  the  excise  controversy  one  writer  defended 
Walpole's  project  on  the  ground  that  it  was  really  a  tax  on  luxuries,  whereas  the 
land  tax  was  a  general  excise.  An  Humble  Address  to  the  People  of  England. 
Being  a  Demonstration  that  a  Land  Tax  is  more  prejudicial  to  Trade  and  Lib- 
erty than  an  Inland  duty  on  Wine  and  Tobacco.  London,  1 733,  especially  pp.  9 
and  17. 

8  An  Essay  on  the  Causes  of  the  Decline  of  the  Foreign  Trade,  consequently  of 
the  Value  of  Lands  of  Britain  and  on  the  Means  to  Restore  Both.  Begun  in  the 
Year  1739.     London,  1744. 

*  For  the  grounds  on  which  the  authorship  is  ascribed  to  Decker  rather  than 
to  Richardson,  see  the  article  in  Palgrave's  Dictionary  of  Political  Economy,  i, 
p.  519.  To  the  authorities  quoted  there  maybe  added  the  statements  in  Tucker, 
A  Brief  Essay  on  Trade,  1750,  pp.  129-149  ;  in  NickoUs,  Remarks  on  the  Advan- 
tages and  Disadvantages,  etc.  (quoted  a  few  notes  below),  pp.  264  and  268  ; 
and  in  Arthur  Young,  Political  Arithmetic,  p.  244,  in  all  of  which  it  is  also 
ascribed  to  Decker.  Professor  Conner,  the  author  of  the  article  in  the  Dictionary, 
states  that  the  edition  of  1749  bears  Decker's  name  on  the  title-page.     It  is  to  be 


Those  who  favor  a  Single   Tax  on  Luxuries     85 

The  author  was  careful  to  emphasize  his  opposition  to  gen- 
eral excise  duties  "because  of  the  great  prejudice  they  do  to 
trade. "  His  plan  was  to  lay  "  One  Tax  on  the  Consumers  of 
Luxuries  and  take  off  all  our  other  Taxes,  Excises,  and  Cus- 
toms." ^  He  gave  a  catalogue  of  the  few  articles  he  wished  to 
have  taxed. 2  It  goes  without  saying  that,  in  his  opinion,  the 
tax  would  remain  where  it  was  put.  "The  greatest  benefit  of 
All,"  he  added,  "is  that  this  Proposal  hath  not  those  extend- 
ing, pernicious.  Trade-destroying  Consequences  of  our  pres- 
ent Taxes  ;  for  it  will  not  raise  the  Value  of  any  one  Com- 
modity, but  rather,  by  checking  Luxury,  the  Bane  of  Virtue 
and  Industry,  we  shall  become  a  rich  and  flourishing  People."  ^ 
An  enthusiastic  advocate  of  this  scheme  for  a  single  tax  is 
to  be  found  in  Josiah  Tucker,  who  outlined  the  plan  in  an 
appendix  to   one  of    his   important  works.*     Tucker's  chief 

remarked,  however,  that  the  later  (Edinburgh)  edition  of  1756  (a  copy  of  which, 
together  with  one  of  the  original  edition,  is  in  the  possession  of  the  present  writer) 
is  anonymous.  The  strongest  argument  against  its  ascription  to  Decker  is  that 
Decker  is  known  to  be  the  author  of  another  tract  of  almost  the  same  date  advo- 
cating a  single  tax  on  houses  (see  below,  chap,  iii),  and  that,  in  many  works 
of  the  fifties  and  sixties,  when  Decker's  scheme  is  mentioned  at  all,  the  reference 
is  to  the  house  tax.  It  seems  improbable  that  two  such  different  projects  should 
have  been  advanced  by  the  same  writer,  without  making  in  the  later  work  any 
reference  at  all  to  the  plan  of  the  former.  Professor  Cunningham  is  also  of  the 
opinion  that  Decker  cannot  be  the  author.  See  The  Growth  of  English  Industry 
and  Commerce  in  Modern  Times,  1892,  p.  409,  note  3.  At  the  same  time,  it  is 
to  be  noted  that  Arthur  Young  in  his  Political  Arithmetic  ascribes  both  works  to 
Decker,  and  speaks  (p.  214)  of  the  tax  on  houses  as  Decker's  "  favorite  scheme." 
Yet  it  was  the  earlier  one,  or  at  all  events  the  one  first  published.  In  a  note  in 
the  Economic  Journal,  vol.  xviii  (1908),  p.  629,  Professor  Conner  withdraws  the 
ascription  of  the  work  to  Decker,  without,  however,  attempting  to  decide  whether  it 
was  written  by  Richardson.  1  An  Essay,  etc.,  p.  44. 

2 Adam  Smith,  who  refers  to  his  "well-known  proposal"  to  tax  "all  commodi- 
ties" (  Wealth  of  Nations,  book  v.,  chap,  ii  ;  Rogers'  ed.,  ii,  p.  474),  as  well  as 
Bastable  {Public  Finance,  2d  ed.,  1895,  p.  318),  who  speaks  of  his  "plan  of  a  li- 
cense for  the  consumption  of  commodities,"  are  not  quite  exact.  For  the  plan  was 
not  to  tax  "  commodities "  or  "all  commodities,"  but  only  certain  "articles  of 
luxury."  One  of  the  chief  recommenilations  of  the  scheme  to  the  author  is  that 
it  will  act  as  a  "  Sumptuary- Law  to  keep  all  People  in  their  proper  Stations." 
—  Ibid.,  p.  51.  *  Ibid.,  p.  52. 

*  .4  Brief  Essay  on  the  Advantages  and  Disadvantages  which  respectively  attend 
France  and  Great  Britain  with  Regard  to    Trade.     The  appendix  is  entitled  An 


86  Shifting  and  Incidence  of  Taxation 

reason  for  the  proposal  is  contained  in  his  general  principle 
that  "  it  is  just  and  reasonable  each  Person  should  pay  in 
proportion  to  what  he  Uses  of  any  Commodity:  Now  the 
most  probable  Grounds  we  can  go  upon  (for  the  affair  will 
not  admit  of  Certainty  and  Demonstration)  is,  That  Persons 
in  general  live  in  Proportion  to  the  Figure  they  make."^ 
Hence  to  tax  a  man  according  to  his  expenditures  for  luxu- 
ries constitutes  the  most  equitable  method  of  taxation.  An- 
other advocate  of  the  scheme  was  Dangeul,^  whose  reasons 
for  opposition  to  the  general  excise  have  already  been 
mentioned.^  After  giving  an  interesting  statement  of  his 
general  philosophy  of  taxation,*  he  concludes  that  "a  free 
tax  bearing  solely  upon  the  different  articles  of  luxury,  and 
consumption  (those  of  absolute  necessity  excepted)  seems 
the  properest  to  fulfill  these  intentions."  He  approves  the 
scheme  as  developed  by  its  original  author,^  and  favors  it 
especially  because  the  amount  spent  on  each  class  of  luxuries 
may  be  regarded  as  a  rough  index  of  the  income  enjoyed 
and  disposable  for  such  a  purpose.^  It  is  interesting  to  ob- 
serve that  this  argument  found  its  way  to  America,  where  it 

Appendix  containing  a  Plan  for  raising  one  only  Tax  on  the  Consumers  of 
Luxuries.  [By  Josiah  Tucker.]  London,  2d  ed.,  1750.  See  esp.  pp.  123-135 
and  145-166.  "^Ibid.,-^.  153. 

^  Remarks  on  the  Advantages  and  Disadvantages  of  France  and  Great  Britain, 
etc.     [By  Sir  John  Nickolls,  really  Dangeul.]      London,  1754. 

^  Supra,  p.  44,  where  the  exact  title  is  given. 

*  "  The  consideration  of  the  different  taxes  which  constitute  the  Revenue  of  the 
State,  and  of  the  inconveniences  of  each,  naturally  leads  a  Patriot  to  the  desire  of 
finding  the  means  of  taxing  all  the  articles  which  could,  and  ought  to  be  made 
contribute,  in  the  justest,  easiest,  equalest  manner,  to  the  Public  charge  ;  that  is 
to  say,  of  taxing  every  subject  in  proportion  to  the  advantage  he  draws  from 
Society :  insomuch,  that  with  respect  to  him  who  has  no  property,  so  far  from 
depriving  him  of  the  hopes  of  acquiring  any,  the  influence  of  the  taxes  should  be 
no  more  than  a  gentle  spur  to  his  industry,  and  that  it  should  fall  reasonably,  and 
not  arbitrarily  upon  those  who  have  some  property,  that  is  to  say,  in  proportion 
to  the  real  and  personal  estates  they  enjoy."  —  Ibid.,  pp.  268,  269. 

^  Dangeul  ascribes  it  to  Decker. 

8  "  He  takes  each  of  these  articles  for  the  sign  of  a  fortune  of  such  a  certain 
revenue,  upon  which  he  is  imposing  a  tax  of  three  pence  for  every  pound  ster- 
ling." —  Ibid.,  p.  269. 


Those  who  favor  a  Single   Tax  on  Luxuries     87 

was  later  utilized  by  Pelatiah  Webster  in  his  struggle  to  per- 
suade Congress  to  adopt  the  import  duty  on  commodities. 
"A  tax  on  general  consumptions,"  Webster  tells  us,  "cannot 
fail  to  bring  the  burden  in  due  proportion  on  individuals,  be- 
cause every  one  will  pay  in  proportion  to  his  consumption, 
and  the  presumption  is  that  the  man  who  spends  most  is  best 
able  to  spend."  ^ 

The  scheme  of  a  tax  on  luxuries  met  in  the  main  with  little 
opposition  in  Great  Britain.  An  exception,  however,  is  to  be 
noted  in  the  case  of  a  contemporary  writer  who  clearly  voiced 
his  preference  for  an  excise,  or  tax  on  the  producer  or  dealer, 
as  compared  to  a  direct  tax  on  the  consumer.  His  conclusion 
is  based  on  the  argument  that  the  consumer  of  an  excised 
article  is  really  not  aware  of  the  tax,  for  "  when  a  tax  is 
blended  with  the  Price  of  the  Commodity,  the  tax  is  forgot, 
or  its  Remembrance  makes  little  Impression,"  whereas  if  a 
tax  is  assessed  directly  on  the  consumer,  it  "  will  be  very  dis- 
gustful." 2  "  He  who  neglects  the  Study  of  Mankind,"  adds 
our  author,  "who  refuses  to  give  Attention  to  their  Passions 
as  well  as  to  their  Reasonings,  is  not  fit  for  the  Government 
of  Mankind."^  The  author  is  notable  not  only  for  advancing 
what  later  on  became  a  common  argument  in  defense  of  in- 
direct taxation  in  general,  but  also  for  his  introduction  of  the 
distinction  between  fiscal  and  social  taxes,*  which  has  played 
a  great  and  increasing  r61e  in  recent  discussion. 

^  A  Sixth  Essay  on  Free  Trade  and  Finance  particularly  showing  that  Sup- 
plies of  Public  Revenue  may  be  drawn  from  Merchandise,  without  injuring  our 
Trade  or  burthening  our  People.  [By  a  Citizen  of  Philadelphia,  1783.]  Re- 
printed in  Political  Essays  on  the  Nature  and  Operation  of  Money,  Public 
Finances  and  other  subjects,  published  during  the  American  War  and  continued 
up  to  the  present  Year,  /"jgi.     [By  Pelatiah  Webster.]      Philatlelphia,  1791,  p.  236. 

^  "There  is  a  great  difference  between  a  Tax,  which,  when  once  paid,  the  Party 
hears  no  more  of,  and  a  Tax  which  operates  as  an  annual  Diminution  of  the 
Income."  —  A  Letter  from  a  Member  of  Parliament  on  the  Plate  Tax.  London, 
1756,  p.  27. 

"  Op.  cit.,  p.  29. 

*  The  distinction  is  expressed  by  the  author  as  one  between  a  tax  of  revenue 
and  a  tax  of  police.  "All  Taxes  ought  to  be  laid  for  one  or  both  of  these  Pur- 
poses.    Either  it  is  a  Tax  of  Revenue,  the  view  of  which  is  to  supply  the  Neces- 


88  Shifting  and  hicidence  of  Taxation 

As  has  been  noted,  however,  the  great  majority  of  authors 
preferred  the  direct  tax  on  luxuries.  Among  the  writers  who 
favored  this  plan,  which  was  soon  adopted, — not,  indeed,  as 
a  single  tax,  but  as  a  supplement  to  existing  taxes,  —  may  be 
mentioned  Forster,^  the  determined  opponent  of  all  taxes  on 
wages,  and  to  a  Umited  extent  Postlethwayt.^  With  the  in- 
corporation of  certain  taxes  on  luxuries  into  the  general 
scheme  of  the  EngUsh  revenue  system,  the  discussion  of  the 
proposition  soon  ceased. 

sities  of  the  Publick,  or  it  is  a  Tax  of  Police,  intended  to  operate  as  a  Restraint; 
for  Instance,  on  the  Importation  or  Consumption  of  foreign  Manufactures,  to  the 
Prejudice  of  our  own,  or  on  some  Article  of  Luxury  prejudicial  to  the  Publick." 
—  A  Letter  from  a  Member  of  Parliatnent  on  the  Plate  Tax.     London,  1756,  p.  13. 

1  An  Enquiry  into  the  Causes  of  the  Present  High  Prices  of  Provisions.  [By 
Nathaniel  Forster.]     London,  1 767.     Part  I,  chap,  iii,  "  Of  Taxes,"  pp.  50-53. 

2  For  the  modified  advocacy  of  Postlethwayt,  see  the  reference  infra,  p.  91. 

A  rather  unusual  forecast  of  some  effects  of  taxation  was  made  in  1785.  "  The 
Commutation  Bill  and  Shop  Tax  bearing  so  very  heavy  on  the  Housekeeper  will 
most  certainly  reduce  the  major  part  to  Poverty  and  Ruin;  and  will  impede 
Matrimony,  and,  together  with  the  Tax  on  Maid  Servants,  be  productive  of  an 
Increase  of  Prostitution,  too  horrid  even  to  imagine."  —  Letters  on  Excessive 
Taxation.     From  a  Philanthropist.     London,  1785,  p.  85. 


CHAPTER    III 
Those  who  favor  a  Single  Tax  on  Houses 

The  revenue  reformers  of  the  eighteenth  century  were 
fond  of  schemes  for  a  single  tax.  Once  granted  that  taxes 
on  consumption  rest  on  the  consumer,  and  that  it  is  wise  to 
avoid  the  incidental  interference  with  trade  which  would 
i-esult  from  taxes  levied  on  the  trader,  it  was  but  a  step 
further  to  contend  that  a  single  tax  on  luxuries,  which  at  all 
events  necessitates  a  scrutiny  into  the  luxurious  expenditures, 
might  be  improved  upon.  By  taking  some  one  criterion  of 
expenditure,  which  was  not  only  universal  but  patent  to  all, 
the  same  results  might  be  reached  with  much  less  difficulty. 
The  desired  criterion,  it  was  now  suggested,  was  the  build- 
ing occupied.  Instead  of  a  general  excise,  it  was  proposed 
to  lay  a  single  tax  on  houses. 

The  chief  advocate  of  this  scheme  was  Sir  Matthew 
Decker.^  He  starts  out  with  the  idea  of  a  tax  or  license 
duty  on  the  consumers  of  tea,  to  replace  the  tax  on  the  im- 
porters or  dealers.  But,  passing  by  this  as  a  matter  of 
minor  importance,  he  proceeds  to  make  the  suggestion  for  a 
"general  excise."  This,  he  is  careful  to  explain,  differs 
entirely  from  what  is  generally  associated  with  that  name. 
His  scheme,  so  he  tells  us,  means  only  "  one  single  Excise- 
Duty,  and  that  upon  Houses."  ^  He  discusses  its  character- 
istics at  great  length,  and  states  its  chief  merits  as  follows : 

^  Serious  Considerations  on  the  several  High  Duties  which  the  A'ation  in  general 
(aj  well  as  its  Trade  in  particular')  labours  under  :  with  a  Proposal  for  prerent 
ing  the  Running  of  Goods,  discharging  the  Trader  from  any  Search,  and  raising 
all  the  Publick  Supplies  by  One  Single  Tax.  By  a  Well- Wisher  to  the  Good 
People  of  Great  Britain.     [Sir  Matthew  Decker.]     London,  1743. 

2  Ibid.,  p.  15. 


90  Shifting  and  Incidence  of  Taxation 

"  All  Duties  being  abolished,  it  would  prevent  all  Manner  of 
Running  and  hinder  the  Ruin  of  many  Thousands  of  poor 
unhappy  Creatures,  which  have  been,  or  are  still  employed  in 
the  Smuggling  Trade  "  ;  furthermore,  "  it  would  set  the  Mer- 
chant and  Shopkeeper  free  from  "a  Multitude  of  false  and 
vexatious,  or  frivolous  Informations,  which  may  now  be 
lodged  against  them  "  ;  and,  above  all,  it  would  enable  "  the 
Merchant  as  well  as  Shop  and  Warehouse-Keeper  to  trade 
with  Half  the  Stock,  and  make  his  Profit  the  same,  or  rather 
increase  it."  ^ 

Everywhere  we  find  the  emphasis  put  on  the  interests  of 
production  and  trade,  because  of  the  opinion  that,  in  the  long 
run,  these  interests  are  the  important  ones  to  be  considered. 
This  appears  clearly  from  his  views  as  to  taxes  on  the  work- 
ingmen.  Although  Decker,  indeed,  desires  to  exempt  the 
houses  "of  the  lowest  and  poorest  Sort  of  People,"  he  puts 
his  demand  on  the  express  ground  that  "  thereby  their  Labour 
might  become  so  much  the  cheaper."  ^  The  incidence  of 
taxes  on  necessaries,  therefore,  according  to  Decker,  is  really 
on  the  employer,  and  not  on  the  laborer.  His  general  idea 
of  favoring  production  and  trade  may  be  seen  also  from  the 
close  of  his  exposition,  where  he  expresses  the  hope  that  it 
may  be  said  of  England,  as  formerly  of  Tyre,  "that  their 
Merchants  are  Princes  and  their  Traffickers  the  Honourable 
of  the  Earth."  ^ 

Decker's  project  was  greeted  by  a  number  of  enthusiastic 
followers.  Most  of  these  preferred  the  single  tax  on  houses 
to  the  general  excise  on  the  ground  that  the  former  would 
bear  less  heavily  on  the  producer  and  the  trader,  since  lower 
taxes  on  necessaries  would  mean  lower  rates  of  wages.  Thus, 
the  author  of  an  anonymous  tract,  in  speaking  of  a  new  plan 
to  be  "  substituted  in  the  room  of  our  present  preposterous 


1  Ibid. ,  p.  23. 

2  "  And  the  Goods,"  he  adds,  "  which  are  the  Produce  of  their  Labour,  might, 
by  this  Means,  be  sold  at  as  low,  or  even  a  lower  Rate  than  can  be  afforded  by 
other  Nations."  —  /iid.,  p.  16. 

8  /did.,  p.  32. 


Those  who  favoi'  a  Single   Tax  on   Houses     gi 

Method  of  Taxing,"  said  that  "a  more  advantageous  Scheme, 
not  altogether  unlike  that  of  Sir  Matthew  Decker's  might 
be  proposed,  which  would  exempt  the  Laborious  from  every 
Tax  ;  by  which  the  landed  Interest  and  all  the  useful  Mem- 
bers of  the  Community  would  be  considerable  Gainers."* 
So  also  Postlethwayt  held  that  an  artificial  rise  of  wages 
through  taxes  was  injurious  to  the  laborer  as  well  as  to  the 
whole  community,  and  put  the  query  "Whether  the  Encrease 
of  Taxes  in  our  State  do  not  all  somehow  ultimately  termi- 
nate upon  our  Trade  and  Commerce."  ^  To  avoid  this  result 
he  favored  "  One  moderate  and  equal  Tax  upon  Houses," 
or,  as  he  puts  it  in  another  place,  "  some  one  general  tax, 
either  upon  houses  or  otherwise."  ^  Postlethwayt,  it  will  be 
seen,  was  not  quite  sure  in  his  mind  as  to  the  advisability  of 
a  single  tax  on  houses  ;  later  he  even  suggested  as  an  alterna- 
tive the  single  tax  on  luxuries*  Another  writer,  Fauquier, 
with  whose  vigorous  opposition  to  the  excise  we  have  already 
become  acquainted,  also  approved  Decker's  scheme.  His 
argument  was  simple.  "  Since  the  Consumer  pays  the  whole 
of  the  Tax,  it  must  be  equal  to  him,  when  he  maturely  weighs 
it,  how  or  on  what  it  is  laid.  All  that  really  concerns  him, 
is  that  he  should  pay  as  little  as  the  Exigencies  of  the  State 
will  admit  of ;  and  that  the  whole  of  what  he  does  pay 
should,  if  possible,  go  clear  of  all  Deductions  into  the  Ex- 
chequer, to  answer  the  Purposes  for  which  it  was  levied."  ^ 

1  TAg  Case  of  the  Five  Millions  fairly  stated  in  regard  to  Taxes,  Trade, 
Law,  Lawyers,  etc.  Addressed  to  the  Guardians  of  our  Liberty.  London,  1758, 
p.  17. 

■^  Great  Britains  True  System  wherein  is  clearly  shewn,  That  an  Increase  of 
the  Public  Debt  and  Taxes  must,  in  a  few  Years,  prove  the  Ruin  of  the  Monied, 
the  Trading  and  the  Landed  Interests  etc.  Humbly  submitted  to  the  Consideration 
of  all  the  Great  Men,  In  and  Out  of  Power.  By  Malachy  Postlethwayt,  Esq. 
London,  1757,  p.  132. 

'^  Ibid.,  pp.  130,  134. 

*  "  A  free  tax,  bearing  solely  upon  the  different  articles  of  Luxury  and  Con- 
sumption (those  of  absolute  Necessity  excepted)."  —  Ibid.,  p.  319.  See  above, 
p.  88. 

^  An  Essay  on  Ways  and  Means,  etc.  By  F.  F.  London,  1756,  p.  22.  For 
the  full  title  of  the  work,  see  above,  p.  29,  note  i.      Fauquier  really  approved  of 


92  Shifting  and  Incidence  of  Taxation 

A  few  writers  accepted  the  principle  of  this  scheme,  while 
desiring  to  modify  it  by  substituting  windows  for  houses. 
The  principal  advocate  of  this  single  tax  on  windows,  Horsley, 
advanced  his  project  immediately  after  Decker  had  pub- 
lished his  plan.^  Horsely,  it  appears,  cared  more  for  the 
"  singleness  "  of  the  tax  than  for  anything  else.  "  It  seems 
to  me  no  otherwise  material,"  he  tells  us,  "  what  you  lay  the 
Duty  on,  so  it  be  a  single  Duty."^  Horsely,  however,  was 
not  the  originator  of  this  scheme  of  a  window  tax,  which 
seems  to  have  been  advanced  for  the  first  time  a  decade 
earlier  by  a  writer  on  the  score  of  an  alleged  equality  which 
would  not  appeal  to  the  modern  mind.  "  The  poorer  Sort  of 
People,"  he  tells  us,  "  live  in  small  Houses  and  they  seldom 
have  more  Windows  than  are  absolutely  Convenient ;  as  on 
the  other  Hand,  the  Nobility  and  Gentry  live  in  large  and 
spacious  Buildings,  and  consequently  have  a  great  Number 
of  Windows  and  perhaps  many  more  for  Ornament  than  for 
Use."  ^  The  same  idea  of  "  consolidating  every  imposition 
whatever,"  in  order  to  "fix  it  altogether  on  windows,"  was  ad- 
vanced by  another  writer  *  a  few  decades  later,  when  all  single 

Decker's  scheme,  only  with  some  modifications.  See  An  Essay,  p.  26.  He  even 
suggested  a  capitation  tax  as  an  alternative.  —  Ibid.,  p.  32  ;  and  more  decidedly 
in  the  postscript  to  the  second  edition,  published  the  same  year. 

^  Serious  Considerations  on  the  High  Duties  examin' d :  addressed  to  Sir 
Matthew  Decker.     By  Mr.  Horsely.     London,  1744. 

2  Ibid.,  p.  32. 

3  The  Occasional  Monitor  :  containing  a  Scheme  or  Proposal  for  taking  off 
the  several  Taxes  on  land.  Soap,  Starch,  Candles,  Leather,  Plate,  etc.  and 
replacing  the  said  Duties  by  another  Tax,  which  will  bring  in  more  Money  in  a 
more  Easy  and  Equal  Manner  and  less  burthensome  to  the  Subject.  Part  II. 
London,  1732,  p.  6.  It  is  worthy  of  note  that  the  author  is  one  of  the  earliest 
advocates  of  the  excess-of-tax-over-price  doctrine  discussed  below  (book  ii,  chap, 
v).  "It  is  remarkable,"  he  tells  us,  "  that  whenever  there  is  a  Tax  laid  upon  any 
Commodity,  the  Price  of  that  Commodity  is  thereupon  advanced  to  double  the 
Amount  of  the  Tax.  The  Reason  why  it  is  so,  and  must  be  so,  is  very  obvious 
and  easy  to  be  accounted  for."  Op.  cit.,  p.  3.  He  does  not  condescend  to  ad- 
vance the  reasons  for  this  simple  phenomenon. 

*  Considerations  on  the  National  Debt  and  nett  Produce  of  the  Revenue  :  with  a 
Plan  for  consolidating  into  one  Rate  the  Land  and  all  other  Taxes,  by  which  More 
Money  will  be  raised;  Individuals  not  pay  half  the  present  Taxes;  Smuggling 


Those  who  favor  a  Single   Tax  on  Houses      93 

tax  ideas  had  about  gone  out  of  fashion.  The  scheme  of  a 
window  tax,  however,  was  vehemently  opposed  by  de  Lolme, 
who  suggested,  on  the  contrary,  as  a  substitute  a  "  tax  assessed 
from  the  internal  capaciousness,  or  Tonnage,  of  houses,"  with 
a  reduction  for  each  aperture,  for  then  "  people  will  no  longer 
think  they  are  under  a  necessity  of  being  Frugalists  or  Oecono- 
mists  in  the  introduction  of  Light  into  their  houses  :  they  will 
indulge  themselves  freely  and  liberally  in  the  use  and  con- 
sumption of  that  fluid."  ^ 

Decker's  project  for  a  single  tax  on  houses  soon  met  with 
determined  opponents.  Of  these,  the  most  prominent  was 
Massie.  In  his  earlier  work,  written  to  controvert  the  plan 
as  set  forth  by  Fauquier,^  Massie  disclosed  only  a  moderate 
opposition.^  But  in  the  following  year  he  turned  his  bat- 
teries in  full  force  against  Decker  himself.*  He  specifies 
all  kinds  of  objections  upon  which  it  is  not  necessary  here  to 
dilate,  farther  than  to  state  that  he  condemns  the  single  tax 
on  houses  as  really  "  a  Proposal  to  raise  all  the  Public  Sup- 
plies by  one  General  Tax  upon  the  Commodities  and  Manu- 
factures of  Great  Britain."  So  far  as  the  incidence  of  the 
tax  is  concerned,  he  believes  that  it  will  be  shifted  to  the 
consumer  ;  for,  "  whatever  Money  a  Farmer,  a  Tradesman,  or 
a  Merchant  pays  for  Taxes  is,  and  must  be  repaid  him  in  the 
Prices  of  the  Commodities  he  deals  in."  ^      He   favors  the 

altogether  prevented ;  .  .  .  the  poor  exempted  from  every  Contribution,  etc.  By  a 
Merchant  of  London.     Lontlon,  1784.     See  esp.  p.  31- 

1  Observations  relative  to  the  Taxes  upon  Windows  or  Lights.  By  J.  L.  de 
Lolme.      London,  178S,  p.  55. 

2  Observations  upon  Mr.  Fauquier'' s  Essay  on  Ways  and  Means  for  raising 
Money  to  support  the  present  War  without  increasing  the  Public  Debts.,  etc.  By 
J.  M.  [Joseph  Massie].     London,  1756. 

^  He  objects  more  to  the  amount  to  be  raised,  than  to  the  manner  of  raising  it. 

*  The  Proposal,  commonly  called  Sir  Matthew  Decker's  Scheme  for  one  (Jeneral 
Tax  upon  Houses,  laid  open ;  and  shewed  to  be  a  deep  concerted  Project  to  tra- 
duce the  Wisdom  of  the  Legislature  ;  disquiet  the  Minds  of  the  People;  and  ruin 
the  Trade  and  Manufacttiries  of  Great  Britain.     [By  Joseph  Massie.]     London, 

1757- 

^  Lbid.,  p.  114.  He  adds  in  another  passage  :  "They  are,  in  reality,  Factors 
between   the    Landholders  and  Consumers  of  Commodities  ;    and    every   Man 


94  Shifting  and  Incidence  of  Taxation 

existing  land  tax  because  it  finally  falls  on  the  landowner.* 
In  respect  to  the  incidence  of  the  other  taxes,  he  seems  to 
revert  to  the  old  theory  that  "  the  Taxes  of  this  Kingdom  are 
so  wisely  laid,  as  to  encourage  Industry  and  good  Husbandry, 
by  discouraging  their  Opposites."^  Somewhat  later  Arthur 
Young  also  opposed  Decker's  scheme  and  the  theory  of  inci- 
dence on  which  it  was  based.  Taxes  on  houses,  he  thinks, 
force  a  man  to  pay  not  because  he  consumes,  but  because  he 
possesses  ;  the  one  [the  excise  or  the  tax  on  consumption]  is 
a  proof  he  is  able  to  pay,  the  other  [the  tax  on  houses]  no 
proof  of  it  at  all.^     This  is  the  last  reference  to  the  scheme, 

knows,  that  a  Factor  must  be  paid  Commission  for  the  Goods  he  sells,  over  and 
above  all  Taxes  and  other  Charges."  —  The  Proposal,  p.  ii6. 

1  "The  Land-Owners  cannot  sell  or  lett  their  Lands  for  more  Money,  because 
they  pay  this  Tax  out  of  their  Rents  ;  for  a  Buyer  of  Land  considers  what  Money 
it  will  bring  for  his  own  use  ;  and  a  Farmer  of  Land  must  consider  what  Prices 
his  Corn,  Cattle,  Wool,  Butter,  Cheese,  etc.,  will  fetch  at  Market.  .  .  .  And  as 
the  Prices  of  these  Commodities  are,  and  necessarily  must  be  governed  by  the 
Money  that  People  in  general  can  afford  to  pay  for  them  (Years  of  Scarcity 
excepted),  the  Land-Tax  must  fall  upon  the  Land-Owners."  —  Ibid.,  p.  38.  Cf. 
also  p.  104. 

2  Ibid.,  p.  68.  That  Massie  set  his  face  sternly  against  any  further  increase  of 
taxation  is  shown  by  two  interesting  pamphlets,  in  which  he  has  not  a  little  to  say 
about  the  question  of  incidence.  See  Reasons  humbly  offered  against  laying  any 
further  British  Duties  on  Wrought  Silks  of  the  Manufacture  of  Italy,  the  King- 
dom of  Naples  and  Sicily,  or  Holland :  shoiuing  the  probable  III  Consequences  of 
such  a  Measure  in  regard  to  the  Landed  Interest,  Woollen  Manufacturies,  Silk 
Manttfacturies,  Fisheries,  Wealth  and  Naval  Power  of  Great  Britain.  London, 
1758.  This  contains  a  bibliography  of  Massie's  writings  up  to  that  date.  Cf.  also 
his  Observations  on  the  new  Cyder- Tax,  so  far  as  the  same  may  affect  our  Woollen 
Manufacturies,  A^ewfoundland  Fisheries,  etc.  London,  1764.  For  Massie's  atti- 
tude on  the  question  of  the  shifting  of  taxes  to  the  poor,  see  above,  p.  61.  In  his 
two  other  important  tracts  on  taxation,  Massie  rather  neglects  the  subject  of  inci- 
dence. See  his  Calculations  of  Taxes  for  a  Family  of  Each  Rank,  Degree,  or 
Class  for  one  Year.  1756.  A  reply  to  this  was  made  by  Bourchier  Qeeve,  and 
a  rejoinder  by  Massie  in  A  Letter  to  Bourchier  Cleeve,  Esq.,  concerning  his  Calcu- 
lations of  Taxes.  1757.  Massie's  suggestion,  of  a  tax  on  bachelors  and  widowers, 
is  based  on  the  theory  that  it  will  not  affect  prices  or  labor.  See  his  Ways  and 
Means  for  Raising  the  Extraordinary  Supplies  to  carry  on  the  War  for  Seven 

Years,  if  it  should  continue  so  long,  without  doing  any  Prejudice  to  the  Manufac- 
turies or  Trade  of  Great  Britain  (by  J.  Massie).     London,  1757. 

^  Political  Arithmetic.  By  Arthur  Young.  London,  1774,  chap,  iii,  sec.  i,  esp. 
p.  214.     During  the  revolutionary  era  in  France  a  similar  scheme  for  a  single  tax 


Those  who  favor  a  Single   Tax  on  Houses       95 

for,  with  the  introduction,  shortly  after,  of  the  tax  on  inhabited 
houses  by  Lord  North,  the  agitation  for  a  single  tax  of  this 
kind  came  to  an  end.^ 

on  houses  was  again  advanced  as  an  entirely  novel  idea.  See  Plan  de  Revolution 
concernant  Us  Finances,  ou  Decouverte  Consolante  de  P Imp6t  Unique  du  Toise. 
Par  M.  Blanc-Gilli,  de  Marseille.  Paris,  1790.  See  esp.  the  Supplement  a  la 
Decouverte  de  l^ Impbt  du  Toise,  pp.  78  et  seq. 

'  The  modern  idea  of  a  single  tax,  as  is  well  known,  contemplates,  on  the 
contrary,  the  exemption  of  houses  from  the  real  estate  tax.  It  is  interesting  to 
note  that  as  early  as  the  seventeenth  century  we  fmd  a  writer  who  suggests  at  all 
events  a  lower  rate  of  taxation  for  houses  than  for  lands.  "  I  have  all  this  while 
been  driving  at  Equality.  But  there  is  an  Equality  so  unequal  that  I  cannot  but 
declare  my  sense  against  it,  and  that  is  :  that  Houses  should  heare  equall  propor- 
tion with  Lands,  for  which  there  is  no  reason,  as  every  man's  reason  will  tell  him." 
—  A  Proposal  for  an  Equal  Land  TaXy  humbly  submitted  for  Consideration. 
London,  1691,  p.  10. 


CHAPTER   IV 
Those  who  favor  a  General  Property  Tax 

By  the  close  of  the  seventeenth  century  the  old  general 
property  tax  in  England  had  become  in  fact  what  it  soon 
became  in  name  —  a  land  tax.^  There  was  not  lacking  then, 
as  now,  a  group  of  writers  who  believed  that  the  panacea 
for  existing  evils  was  to  be  found  in  the  reimposition  of  a 
tax  on  the  various  kinds  of  personal  property,  and  espe- 
cially of  intangible  personalty.  This  belief  most  commonly 
took  form  in  demands  for  a  tax  on  moneys  at  interest,  sup- 
plemented a  little  later  by  calls  for  a  tax  on  the  evidences  of 
debt  or  on  funds  in  general.  All  these  demands  were  based 
on  the  theory  that  a  tax  on  loans  would  fall  on  the  lender. 

The  earliest  formulation  of  such  a  demand  is  found  in  a 
work  of  the  younger  Culpeper.^  Taxes  on  land,  says  he, 
fall  on  the  landowner,  while  taxes  on  trade  and  luxury  rest 
there  and  leave  the  usurer  free.^  Taxes  on  moneys  at  inter- 
est, however,  would  not  only  diminish  the  curse  of  usury, 
but  since  they  fall  on  the  lender,  they  would  raise  the  value 
of  land,  which  now  bears  far  more  than  its  proportion  of 
taxes.* 

^  See  Seligman,  Essays  in  Taxation,  5th  ed.,  1905,  pp.  45-48. 

2  The  Necessity  of  Abating  Usury  re-asserted ;  in  a  Reply  to  the  Discourse  0/  Mr. 
Thomas  Manley  entituled,  Usury  at  Six  per  Cent,  examined,  etc.,  together  with  a 
Familiar  and  inoffensive  way  propounded  for  the  future  Discovery  of  summes  at 
Interest,  that  they  may  be  charged  with  their  equal  shares  of  Publick  Taxes  and 
Burthens,  etc.  By  Sir  Thomas  Culpeper,  Jun.,  Knight,  London,  1670.  For 
Manley's  treatise,  and  his  views  on  the  question,  see  above,  p.  47.  For  an 
earlier  work  of  Culpeper,  and  his  views,  see  above,  p.  25. 

^  Ibid.,  pp.  5-7. 

*  "I  cannot  but  with  trouble  reflect,  that  Land  and  Trade  should  so  conspire  to 
plav  the  Usurers  game  against  themselves,  as  by  their  discord  all  along  they  have 

96 


Those  who  favor  a  General  Property  Tax      97 

Another  writer,  who  entered  more  thoroughly  into  the  dif- 
ficulties connected  with  the  problem  of  incidence,  was  not 
blind  to  the  fact  that  in  the  ordinary  course  of  events,  a  tax 
on  interest  tends  to  be  shifted  to  the  borrower.  He  believed, 
however,  that  this  might  be  prevented  by  an  act  of  Parlia- 
ment, and  that  the  tax  might  be  enforced  through  a  compul- 
sory registration  of  all  debts  and  mortgages.^  In  the  same 
way,  Davenant,  who  thought  that  "  there  is  nothing  too  hard 
for  the  wisdom  of  a  parliament  to  bring  about,"  proposed  a 
tax  on  "  the  usurers,  who  are  the  true  drones  of  a  common- 
wealth, living  upon  the  honey  without  any  labour."  ^  This 
was,  however,  only  a  passing  fancy  of  Davenant,  whose  fun- 
damental theory  of  incidence  was  somewhat  different.^ 

Other  writers  wished  to  include  not  only  moneys  at  interest, 
but  all  kinds  of  personalty,  to  form  a  general  property  tax. 
Thus,  one  author,  who  objected  to  the  "sole  Land-Taxes,"* 
demanded  that  "  Sums  at  Interest  with  all  other  Liquid 
Revenues  shall  pay  the  Quota  in  a  due  proportion  with  our 
Land-Rents."     This  "  due  proportion,"  as  he  soon  attempts 

done;  The  trader  crying,  taxe  Land,  in  Gods  name,  for  that  will  bear  it,  trade 
cannot;  And  the  Land-lord  of  late,  spare  Land,  for  Gods  sake,  it  hath  already 
been  taxed  to  death;  Taxe  now  our  superfluous  trade,  and  therein  our  luxury; 
Giving,  it  seems,  the  Usurer  over  to  his  Reprobate  sense,  and  therefore  freely 
permitting  him  to  thrive  in  this  World;  But  little,  in  the  mean  time,  considering, 
that  tillage  and  traftick  lay  in  one  belly  the  Earth,  sayle  in  one  bottom  upon  the 
Sea,  and  fear  one  Pyrate  or  vermine,  the  Usurer."  —  Ibid.,  p.  15. 

^  A  Plain  and  Easie  IVay  for  the  Speedy  Raising  of  Money  to  supply  their 
Majesties  Present  Occasions  :  which  will  also,  very  much  tend  to  the  Advancing  the 
Value  of  Lands.  By  a  Divine  of  the  Church  of  England.  London,  1691.  Cf. 
esp.  pp.  12,  30,  31. 

2  These,  he  thinks,  "  should,  of  all  people,  be  brought  in  to  bear  their  propor- 
tion of  the  common  burden."  "As  yet,"  he  adds,  "  they  could  never  be  effectually 
reached  but  they  may  be  fetched  in  by  the  wisdom  of  a  parliament,  if  the  house 
of  commons  would  please  resolutely  to  set  themselves  about  it."  —  An  Essay  upon 
Ways  and  Means  of  supplying  the  War.  [By  Charles  Davenant.]  London, 
1695.  Reprinted  in  Collected  Works  of  Davenant,  edited  by  Whitworth.  Lon- 
don, 1 77 1.      Cf.  p.  Ill  of  the  original  or  vol.  i,  p.  57  of  the  reprint, 

*  -See  below,  p.  103. 

*  A  Letter  from  a  Gentleman  to  his  Eriend,  by  way  of  Answer  to  one  from  Him, 
shewing  the  Present  Expedient  and  Easiness  of  Equal  Taxing.  [By  R.  S.] 
London,  n.d.  [about  1692],  p.  10. 


98  Shifting  a7id  Incidence  of  Taxation 

to  prove,  is  a  considerably  higher  rate  than  that  levied  on 
land.^  Two  other  writers  of  about  the  same  date,  whose 
views  on  the  excise  have  already  been  mentioned,  ^  were  also 
heartily  in  favor  of  this  scheme.  The  one  thought  that  a 
tax  on  personalty  joined  to  the  tax  on  lands  would  form  "  a 
mixed  and  comprehensive  Quota,  or  Tax  upon  all  Abilities  "  ;  ^ 
the  other  simply  desired  the  reimposition  of  the  "  Subsidy  or 
Pound  Rate  as  the  Ancient  Methods  of  our  Ancestors."  * 
De  Foe  also,  at  the  end  of  the  century,  objected  not  only  to 
the  taxes  on  the  poor,^  but  to  the  inequality  of  the  land  tax,^ 
which  he  thought  might  be  remedied  by  assessing  every  one 
according  to  his  stock  of  property.'' 

A  few  years  later  the  same  scheme  was  propounded  in  a 
work  written  to  advocate  the  taxation  of  annuities  and  of 
shares  in  the  East  India  Company  and  in  the  Bank  of  Eng- 
land, as  well  as  of  moneys  at  interest.^  The  author's  ideal 
was  a  "  just  and  equal  Tax,  obliging  all  Ranks  and  Degrees  of 

^  He  demands  that  "  all  the  Liquid-Rents  be  charged  to  pay  either  the  double, 
or  at  least  one  Third  part  more  than  the  Land-Rents,  which  are  so  sensibly  liable 
to  grievous  endless  Repairs,  with  abundance  of  other  Charges,  vast  trouble  oft-times 
in  Managing,  and  by  daily  sad  Experience,  severe  Casualties  and  Losses."  —  A 
Letter  from  a  Gentleman  to  his  Friend,  p.  1 1 . 

^  Above,  pp.  36  and  63. 

*  A  Letter  from  a  Gentleman  in  the  Country  to  his  Friend  in  the  City  :  touch- 
ing Sir  William  Petty's  Posthumous  Treatise  entitled  Verhum  Sapienti.  Lon- 
don, 1691,  p.  15. 

*  An  Essay  upon  Taxes  calculated  for  the  Present  Juncture  of  affairs  in  Eng- 
land.    London,  1693,  pp.  20-24. 

*  "  In  a  General  Tax,  if  any  shou'd  be  excus'd,  it  shou'd  be  the  Poor,  who  are  not 
able  to  pay,  or  at  least  are  pinch'd  in  the  necessary  parts  of  Life  by  paying."  — 
An  Essay  upon  Projects.     [By  Daniel  De  Foe.]     London,  1 697,  p.  vii. 

®  "  And  not  to  run  on  in  Particulars,  I  affirm.  That  in  the  Land-Tax  Ten  certain 
Gentlemen  in  London  put  together,  did  not  pay  for  half  so  much  Personal  Estate, 
call'd  Stock,  as  the  poorest  of  them  is  reputed  really  to  possess."  —  Ibid.,  p.  xi. 

'  "  If  I  were  to  be  ask'd  how  I  wou'd  remedy  this  ?  I  wou'd  answer,  It  shou'd 
be  by  some  Method  in  which  every  man  may  be  tax'd  in  the  due  proportion  to  his 
Estate,  and  the  Act  put  in  execution,  according  to  the  true  Intent  and  Meaning  of 
it ;  in  order  to  which  a  Commission  of  Assessment  shou'd  be  granted  to  Twelve 
Men."  —  Ibid.,  p.  viii. 

*  An  Essay  concerning  the  Necessity  of  Equal  Taxes  ;  and  the  Dangerous  Con- 
iequences  of  the  Encouragement  given  to  Usury  among  us  of  late  Years.    With  some 


Those  who  favor  a  General  Property  Tax      99 

men  to  pay  to  the  support  of  the  Government  in  proportion 
to  their  share  in  the  Publick,  and  the  benefits  they  reap  from 
it."^  This  ideal,  he  thought,  could  be  reached  "by  taking 
of  Money,  according  to  its  product  in  Interest,  as  it  were  so 
much  a  year  in  Land."  ^ 

The  time  for  such  projects,  however,  had  already  passed, 
although  the  proposition  was  occasionally  revived.  Wagstaffe, 
for  instance,  at  the  beginning  of  the  eighteenth  century, 
painted  in  glowing  colors  the  defects  of  the  existing  system.^ 
"  If  a  General  Excise,  and  any  other  Provision  for  an  equal 
Tax  may  be  feasible,"  he  added,  "  no  Man  shall  more  readily 
embrace  it  than  myself."  In  default  of  any  such  scheme,  how- 
ever, he  outlined  his  plan  for  a  tax  on  personal  property,  and 
engaged  "to  shew  that  it  will  be  so  far  from  being  Prejudi- 
cial to  the  Trade  of  the  Nation,  that  'tis  the  only  way  to 
Encourage  and  Support  it."*     In  the  fifth ^  and  sixth**  dec- 

Proposals  to  promote  the  Former  and  give  a  Check  to  the  Latter.  By  the  author 
of  The  History  of  the  Last  Parliament.  London,  1702.  This  was  probably 
written  by  James  Drake,  M.D.,  although  it  is  also  ascribed  to  Sir  Richard 
Blackmore  (as  in  the  Manchester  Free  Library  catalogue). 

1  Ibid.,  p.  5. 

2  Ibid.,  p.  II.  "Till  such  a  Scheme  for  raising  Money,"  he  says  in  another 
place,  "  may  be  contriv'd,  as  shall  reduce  Money  and  Land  to  a  just  proportion 
in  the  expences  of  the  Nation,  the  Publick  will  always  lean  on  the  wrong  side, 
and  be  in  a  tottering  condition."  —  Ibid.,  p.  3. 

^  The  State  and  Condition  of  our  Taxes  considered ;  or,  a  Proposal  for  a  Tax 
upon  Funds  :  shewing  the  Justice,  Usefulness,  and  Necessity  of  such  a  Tax,  in 
respect  to  our  Trading  and  Landed  Interest,  and  especially  if  we  engage  in  a  new 
War.,  etc.  By  a  Freeholder  [William  Wagstaffe].  London,  1714.  A  similar 
plan  is  found  in  Fair  Payment  no  Spunge,  etc.      1717.     See  above,  p.  42. 

*  The  State  and  Condition  of  our  Taxes,  p.  16. 

^  Pro  Commodo  Regis  et  Popttli.  Publick  Funds  for  Publick  Service,  by  raising 
Three  Millions  of  Money,  or  a  Million  and  a  Half  with  Ease  and  Ability,  without 
Charge  of  Collecting,  or  affecting  Land  or  Trade,  or  burdening  Tax  upon  Tax. 
In  an  Appeal  to  the  Impartial  and  Common  Understanding  of  all  Mankind. 
London,  1744.  The  author  bases  his  claim  on  the  following  argument:  "The 
Land  is  the  Wealth  of  the  Country,  has  it's  natural,  and  artificial  Product,  The  one 
the  Fruits  of  the  Earth,  the  other  the  Manufactures  and  Labour  of  it;  But  if  it  is 
solely  loaded  with  constant  heavy  Taxes,  it's  Possessors  generally  will  be  poor."  — 
p.  19.     (7:  p.  17. 

*  Thoughts   on   the  pernicious   Consequences  of  borro^ving  Money.     Lon<]on 
J  759- 


lOO  Shifting  and  Incidence  of  Taxation 

ades  of  the  eighteenth  century  we  again  meet  with  allusions 
to  the  scheme.  But  the  current  of  opinion,  as  well  as  the 
actual  practice  of  the  day,  was  so  strongly  against  the 
scheme  of  a  tax  on  personal  property  that  very  few  writers 
took  the  trouble  formally  to  refute  the  reasoning  on  which 
it  was  based.^  One  or  two,  indeed,  attempted  to  show  that 
the  reduction  in  the  rate  of  interest  on  the  funds  was  in 
effect  a  tax  on  funds.^  But  such  an  obviously  weak  argu- 
ment was  not  necessary.     Little  more  was  heard  of  the  plan. 

1 A  seventeenth-century  author  of  what  is  probably  the  first  treatise  on  equal 
taxation  includes  in  his  recommendation  of  excise  a  payment  also  on  lands  and 
money.  The  excise,  however,  should  not  be  imposed  upon  "  the  fundamentalls, 
as  I  may  terme  them,  of  man's  life."  For  the  principle  is  that  "  in  all  matters  of 
Taxes  the  State  lay  her  Finger  on  things  necessary  for  man's  sustenance  and  her 
Loynes  on  such  things  as  are  merely  superfluous."  The  Standard  of  Equality 
in  subsidiary  Taxes  dr"  Payments  or  a  Just  and  Strong  Preserver  of  Publique 
Liberty.     London,  1647. 

2"  A  Reduction  of  Interest  is  to  all  Intents  and  Purposes  a  Tax."  —  A  Serious 
Address  to  the  Proprietors  of  the  Publick  Funds,  occasion'' d  by  several  late  Schemes 
for  Reducing  their  Interest  or  Subjecting  them  to  Taxes  :  in  which  the  Rights  of 
Publick  Creditors  are  explained  and  asserted,  their  just  claim  .  .  .  to  an  exemp- 
tion froin  Taxes  fully  demonstrated,  etc.  Humbly  submitted  to  the  Consideration 
of  the  Members  of  the  House  of  Commons.  London,  1744,  p.  41.  "  Those  who 
say  that  Land  and  Trade  have  borne  all  the  Burthen,"  adds  the  author,  "  &  that 
such  as  have  lent  their  Money  to  the  Publick  have  paid  nothing,  really  beg  the 
Question,  and  take  that  for  granted  which  it  is  not  in  their  Power  to  prove,  nay 
the  very  reverse  of  which  is  true."  —  Ibid.,  pp.  36,  37. 


CHAPTER  V 
Those  who  favor  a  Single  Tax  on  Land 

The  theory  that  all  taxes  are  finally  shifted  to  the  land- 
owner is  commonly  ascribed  to  the  Physiocrats.  Yet  the 
same  theory  was  expounded  in  England  long  before  their 
time.  The  first  inkling  of  the  doctrine  is  found  in  a  cele- 
brated seventeenth-century  tract,  in  which  the  author  con- 
tends that  the  landowners  "  bear  all  the  Taxes  and  publick 
burthens ;  which  in  truth  are  onely  born  by  those  who  buy  and 
sell  not ;  all  sellers  raising  the  price  of  their  commodities,  or 
abating  of  their  goodness,  according  to  their  Taxes."  ^ 

This  theory  of  incidence  was,  however,  worked  out  much 
more  fully  by  John  Locke.  He  lays  down  his  general  thesis 
in  the  words  :  "  Taxes,  however  contrived,  and  out  of  whose 
Hand  soever  immediately  taken,  do,  in  a  Country,  where  the 
great  Fund  is  in  Land,  for  the  most  part  terminate  upon 
Land."  ^  To  prove  this,  Locke  first  attempts  to  show  that  a 
tax  levied  on  the  landowner  cannot  be  shifted.  If  the 
"  country  gentleman  "  actually  pays  the  tax  out  of  his  own 

^  /Reasons  for  a  Limited  Exportation  of  Wooll.  1677,  p.  5.  The  author  also 
states  that  the  landowners  "  are  Masters  and  Proprietaries  of  the  foundation  of  all 
the  wealth  in  this  Nation,  all  profit  arising  out  of  the  Ground,  which  is  theirs." 
Therefore  it  is  much  more  to  the  interest  of  the  nation  to  "  preserve  the  Nobility, 
Gentry,  and  those  to  whom  the  Land  of  this  Country  belongs  then  a  few  Artificers 
imployed  in  working  the  Superfluity  of  our  Wooll  or  the  Merchants  who  gain  by 
the  exportation  of  our  Manufacture."  This  tract  was  written  as  a  reply  to  Eng- 
land''s  Interest  by  Trade  asserted,  shewing  the  Necessity  and  Excellency  thereof, 
etc.  By  W.  C  (William  Carter),  a  Servant  to  his  King  and  Country.  London, 
1671.  It  was  in  turn  answered  by  Carter  in  A  Eeply  to  a  Paper  Intituled 
Reasons  for  a  Limited  Exportation  of  Wooll,  or  Objections  against  England's 
Interest.     London,  1689. 

"^  Some  Considerations  of  the  Consequences  of  the  Lowering  of  Interest,  and 
Raising  the  Value  of  Money.     In  a  Letter  to  a  Member  of  Parliament.     [By 

lOI 


I02  Shifting  and  Incidence  of  Taxation 

pocket,  says  Locke,  he  certainly  feels  the  burden.  But  "  this 
influences  not  at  all  the  yearly  Rent  of  the  Land,  which  the 
Rack-renter  or  under  Tenant  pays  ;  it  being  the  same  thing  to 
him,  whether  he  pays  all  his  Rent  to  the  King  or  his  Land- 
lord." For  the  "Tenant's  Bargain  and  Profit  is  the  same, 
whether  the  Land  be  charg'd,  or  not  charg'd  with  an  Annuity 
payable  to  another  Man."  The  landowner,  in  other  words, 
cannot  shift  a  land  tax.^ 

But  how  is  it,  if  taxes  are  levied  not  on  land  but  on  com- 
modities }  A  tax  on  commodities,  says  Locke,  must  raise  the 
price  of  the  commodities  to  the  consumer.  "  Let  us  see  now 
who  at  long  run  must  pay  this  and  where  it  will  light."  "  'Tis 
plain,  the  Merchant  and  Brokre,  neither  will  nor  can ;  for 
if  he  pays  more  for  Commodities  than  he  did,  he  will  sell 
them  at  a  Price  proportionably  raised."  On  the  other  hand, 
the  "poor  Labourer  and  Handicraftsman  cannot;  for  he  just 
lives  from  hand  to  mouth  already."  The  consequence  of  a 
tax  on  the  laborer  will  be  either  that  "  his  Wages  must  rise 
with  the  Price  of  things,  to  make  him  live,  or  else,  not  being 
able  to  maintain  himself  and  Family  by  his  Labour,  he  comes 
to  the  Parish  ;  and  then  the  Land  bears  the  Burthen  a  heavier 
way."  But  if  the  laborer's  wages  rise,  the  farmer  who  must 
pay  "  more  for  Wages  as  well  as  other  things,  whil'st  he  sells 
his  Corn  and  Wool,  either  at  the  same  rate,  or  lower,  at  the 
Market  (since  the  Tax  laid  upon  it  makes  People  less  for- 
ward to  buy)  must  either  have  his  Rent  abated,  or  else  break 
and  run  away  in  his  Landlord's  Debt,  and  ...  so  the  yearly 
Value  of  the  Land  is  brought  down,  and  who  then  pays  the 
Tax  at  the  years  end  but  the  Landlord }  "  ^ 

A  tax  on  commodities  imported,  he  continues,  will  always 
be  shifted  from  the  merchant  to  the  consumer.  In  fact,  the 
importer  will  generally  expect  a  profit  and  "  raise  his  price 

John  Locke.]  London,  1692,  p.  87.  The  date  of  this  work  is  generally  given  as 
1 69 1.  But  although  the  epistle  dedicatory  bears  the  date  of  Nov.  7,  1691,  the  book 
itself  has  the  imprint  1692.  The  passage  quoted  in  the  text  may  also  be  found 
reprinted  in  the  Collected  Works  of  John  Locke,  12th  edition,  1824,  vol.  iv,  p.  55. 

1  Some  Considerations,  pp.  88,  89. 

'^  Ibid.,  p.  91. 


Those  who  favor  a  Single  Tax  on  Land      103 

above  what  his  Tax  comes  to."  For  "you  must  not  think 
that  the  raising  their  Price  will  lessen  the  vent  of  fashionable, 
Foreign  Commodities  amongst  you."  ^  With  the  produce  of 
land  it  is  different.  "  Your  Landlord  being  forced  to  bring 
his  Commodities  to  Market,  such  as  his  Land  and  Industry 
afford  him,  common  and  known  things,  must  sell  them 
there  at  such  price  as  he  can  get."  When  a  tax  is  laid  on 
these  "  homebred  Commodities,"  which  are  seldom  "  the 
Favourites  of  your  people,  every  one  makes  as  sparing  a  use 
of  them  as  he  can ;  "  prices  will  fall  and  rents  will  decrease. 

Hence  Locke  concludes  in  the  famous  passage  :  "  It  is  in 
vain,  in  a  Country  whose  great  Fund  is  Land,  to  hope  to  lay 
the  publick  charge  of  the  Government  on  anything  else,  there 
at  last  it  will  terminate.  The  Merchant  (do  what  you  can) 
will  not  bear  it :  the  Labourer  cannot,  and  therefore  the  Land- 
owner must ;  and  whether  he  were  best  to  do  it,  by  laying 
it  directly  where  it  will  last  settle,  or  by  letting  it  come  to 
him  by  the  sinking  of  his  Rents,  which  when  they  are  once 
fallen,  every  one  knows  are  not  easily  raised  again,  let  him 
consider."  2 

Locke's  theory  was  soon  accepted  by  a  number  of  writers. 
One  of  the  earliest  was  the  renowned  financier  Davenant. 
But  while  Davenant  accepts  Locke's  theory  of  incidence,  he 
does  not  draw  the  conclusion  that  it  is  advisable  to  levy  a 
single  tax  on  land.  For  instance,  he  intimates  in  one  place 
that  it  may  be  wise  to  supplement  the  land  tax  by  a  "  tax  on 
money."  ^  He  is  also  quite  a  partisan  of  the  excise,  and  asks 
"  Can  any  tax  be  more  reasonable  .-*  "  He  thinks,  however, 
that  "  the  proper  commodities  to  lay  excises  upon  are  those 
which  serve  merely  to  luxury,  because  that  way  the  poor 
would  be  least  affected."*     Even  here,  however,  he  believes 

^  Some  CotisiJcraiions,  pp.  92,  93. 

2  Ibiii.,  p.  95,  96.  This  is  the  first  instance  in  English  literature  of  any  allusion 
to  the  term  "  direct  taxes." 

^  See  above,  p.  97. 

*  An  Essay  upon  Ways  and  Afeans  of  supplying  the  War.  [By  Charles 
Davenant.]  London,  1695.  ^^  '^^  Collected  Works  of  Davenant,  edited  by 
Whitworth,  London,  1771,  vol.  i,  pp.  65,  66;    or  p.  130  of  the  original. 


I04  Shifting  and  Incidence  of  Taxation 

that  excises  also  fall  ultimately  on  land,  even  if  with  some- 
what less  crushing  force  than  a  direct  land  tax.^  Dave- 
nant,  in  fact,  holds  that  the  farther  off  taxes  are  laid 
from  the  producer,  the  smaller  will  be  their  tendency 
to  rest  on  the  land.^  But  this  tendency,  he  admits, 
cannot  be  entirely  arrested  ;  and  he  does  not  shrink 
from  stating  that  "  all  taxes  whatsoever  are  in  their  last 
resort  a  charge  upon  land."^     So  also  Asgill*  and  Cantil- 

^  "Though  excises  will  affect  land  in  no  degree  like  taxes  that  charge  it 
directly,  yet  excises  will  always  lie  so  heavily  upon  the  landed  man,  as  to  make 
them  concerned  in  parliament,  to  continue  such  duties  no  longer  than  the  neces- 
sity of  the  war  continues."  —  An  Essay  upon  Ways  and  Means,  p.  77. 

2  "All  excises  should  be  laid  as  remotely  from  land  as  possible;  it  is  true  they 
yield  less  when  so  put,  because  the  first  maker  is  best  come  at;  but  when  the  last 
manufacturer  or  vender  is  charged,  they  lie  with  most  equality  upon  the  whole 
body  of  the  people,  and  come  not  upon  land  in  so  direct  a  manner."  —  Discourses 
on  the  Publick  Revenues  and  on  the  Trade  of  England.  London,  1698.  In 
Collected  Works,  \,  p.  224;    or  part  i,  p.  151  of  the  original. 

In  a  later  work,  Davenant  neglects  this  aspect  of  the  excises,  and  emphasizes 
their  injurious  results  to  trade.  "There  is  scarce  any  of  these  new  Revenues, 
which  do  not  give  Trade  some  desperate  Wound.  The  Additional  Duties  on 
Beer  and  Ale,  and  the  Tax  upon  Malt  are  apparently  a  Burthen  upon  the  Woollen 
Manufactures,  affecting  the  Carder,  Spinner,  Weaver  and  the  Dyer,  who  all  of 
them  must  be  rais'd  in  their  Wages,  when  the  Necessaries  of  Life  are  rais'd  to 
them.  The  Consequences  of  which  will  be.  That  our  Woollen  Goods  must  come 
at  a  heavy  and  disadvantagious  Price  into  the  Foreign  Markets." — An  Essay 
upon  the  Probable  Means  of  making  a  People  Gainers  in  the  Ballance  of  Trade. 
By  the  author  of  the  Essay  upon  Ways  and  Means.  London,  1699,  p.  145. 
This  passage  is  quoted  in  a  later  tract :  Dr.  Davenant^s  Opinion  Anent  the 
Salt  and  Malt  Taxes  in  England.  London,  1706.  Cf.  also  a  passage  much 
quoted  at  the  time  of  Walpole's  Excise  scheme :  "  This  may  be  generally  said. 
That  all  Duties  whatsoever,  upon  the  Consumption  of  a  large  Produce,  fall  with 
the  greatest  Weight  upon  the  Common  Sort;  so  that  such  as  think  in  new  Duties 
that  they  chiefly  tax  the  Rich,  will  find  themselves  quite  mistaken;  for  either  their 
Fund  must  yield  little,  or  it  must  arise  from  the  whole  Body  of  the  People,  of 
which  the  richer  Sort  are  but  a  small  Proportion."  This  passage  is  quoted  on  the 
title-page  of  The  Nature  of  the  Present  Excise  and  the  Consequences  of  its  farther 
Extension  examined.     London,  1733. 

*  Aft  Essay  upon  Ways  and  Means.     Collected  Works,  i,  p.  77  ;  or  orig.,  p.  153. 

*  Several  Assertions  Proved  iti  order  to  Create  another  Species  of  Money  than 
Gold  or  Silver.  By  John  Asgill.  London,  1696,  esp.  p.  20.  "  Man  deals  in 
nothing  but  Earth  ;  the  Merchants  are  the  Factors  of  the  world  to  exchange  one 
parte  of  the  earth  for  another.  The  King  himself  is  fed  by  the  labour  of  the  ox 
and  the  Cloathing  of  the  army  and  the  Victualing  of  the  navy,  must  all  be  paid 


Those  who  favor  a  Single  Tax  on  Land     105 

lon^  were  worthy  precursors  of  the  Physiocrats,  so  far  as 
they  asserted  that  land  was  the  real  foundation  of  all  wealth, 
and  therefore  ultimately  bore  the  weight  of  all  taxes. 

In  the  early  decades  of  the  eighteenth  century,  Locke's 
theory  is  frequently  encountered.  Some  authors,  like  Wood, 
were  quite  content  simply  to  quote  his  views.^  Others  sought 
to  add  to  Locke's  argument.  One  writer,  who  accepts  the 
general  theory,  boldly  takes  issue  with  the  doctrine  as  ex- 
pounded by  Davenant,  and  maintains  that  the  more  indirect 
the  tax,  the  worse  it  will  be  for  the  landowner.^  Another 
writer,  whose  pages  are  filled  with  quotations  from  Locke,  does 
not  deny  that  excises  add  to  the  price  paid  by  the  consumer, 
but  thinks  that  the  producer  also  pays  the  tax,  at  all  events 
in  part.^     He  seeks  to  prove  this  by  an  inductive  study  of 

for  to  the  owner  of  the  soil  as  the  ultimate  Receiver,  and  whatever  the  ultimate 
Receiver  will  demand  or  accept  must  be  a  rule  for  the  intermediate  Receivers  to 
govern  themselves  by."  Asgill  was  first  quoted  by  Lauderdale  in  An  Inquiry  into 
the  Nature  and  Origin  of  Public  Wealth.     London,  1804,  p.  113. 

^  Cantillon,  Essai  sur  la  A^ature  du  Commerce  en  General,  1755.  (Transla- 
tion of  the  English  work  written  before  1734  but  not  published.)  See  esp.  chap, 
xii :  "Tous  les  Ordres  et  tous  les  Hommes  d'un  Etat  subsistent  ou  s'enrichissent 
aux  depens  des  Proprietaires  des  Terres." 

"^  A  Letter  to  a  Member  of  Parliament :  shewing  the  Justice  of  a  more  equal  and 
impartial  Assessment  on  Land :  the  Sacredness  of  Publick  Engagements  :  the  Ad- 
vantages of  lowering  the  Customs  and  high  Duties  on  Trade  :  And  the  Ease  of 
reducing  by  Degrees  the  Debts  of  the  Nation.  London,  1 71 7,  esp.  pp.  7  and  28. 
If  this  pamphlet  was  not  written  by  William  Wood,  he  must  be  accused  of  plagi- 
arism. For  in  a  large  work  of  the  next  year,  which  Wood  wrote,  we  find  whole 
pages  on  the  subject  of  taxation,  including  extracts  from  Locke,  copied  word  for 
word  from  the  pamphlet,  without  mentioning  it  at  all.  Cf.  A  Survey  of  Trade 
in  Four  Parts  .  .  .  together  with  Considerations  on  our  Money  and  Bullion.  [By 
William  Wood.]  London,  1718,  pp.  68-72,  where  pp.  5-8  of  the  pamphlet  are 
copied  bodily.  Wood,  however,  does  not  go  quite  as  far  as  to  advocate  the  single 
tax  on  land.      He  simply  objects  to  taking  off  any  taxes  on  land. 

*  "  If  Land  Owners  can  and  do  prevent  the  Load  of  a  Tax  from  falling  directly 
and  immediately  on  themselves,  yet  in  the  last  Resort  there  it  will  fall,  let  them 
shift  it  seemingly  as  far  off  as  they  will  in  the  first  Imposition;  and  perhaps  just 
so  much  farther  off  from  them  as  it  is  laid  in  the  first  Instant,  and  according  to 
common  View  and  Estimation,  just  so  much  the  more  heavily  it  comes  upon  them 
at  the  last."  —  An  Essay  on  L. eases  and  Annuities.  London,  n.d.  \^circa  1730], 
p.  109. 

*  "There  is  no  Doubt  but  the  last  Rctaler  of  excisable  Goods  makes  an  Addi- 


io6  Shifting  and  Incidence  of  Taxation 

the  malt  tax.  The  same  result,  he  thinks,  is  clear  from  a 
scrutiny  of  the  "  duty  on  lights,"  which  was  intended  as  a 
tax  on  the  tenant,  and  yet  turned  out  to  be  a  tax  on  the 
owner.^  "In  this  Instance,"  says  our  author,  "we  see  how 
readily  and  quickly  the  Tax  centers  in  the  Landlord ;  from 
whence  one  would  suspect  that  this  is  the  Case  in  most  of  the 
excisable  Goods." ^  "The  many  windings  and  turnings  in 
Trade,"  he  concludes,  "  may  make  it  longer  e'er  the  Tax 
reaches  the  Landholder,  and  may  prevent  our  discovering  how 
it  takes  its  Course,  yet  there  it  must  and  does  come  at  last."  ^ 
At  the  time  of  Walpole's  excise  scheme,  it  was  but  natural 
that  this  view  should  again  be  emphasized.  One  of  the  dis- 
putants sought  to  crush  his  adversary  by  stating  that  "it 
hath  been  fully  proved  by  unanswerable  Authority  that  all 
Taxes,  in  this  Kingdom,  must  ultimately  affect  Land."* 
Another  writer  stated  somewhat  less  emphatically :  "  But 
if  Mr.  Locke's  Reasoning  be  true  (as  it  still  appears  to  be, 
notwithstanding  what  has  been  urged  against  it),  that  all 
Duties  on  Commodities  of  home  Consumption  terminate  on 
the  landed  Man,"  the  ordinary  objections  to  the  excise  are 
invalid.^  But  after  Locke,  the  theory  was  most  fully  ex- 
plained at  about  the  same  time,  although  independently  of 

tion  to  the  Price  of  them,  equal  to  the  Tax  laid  upon  them  ;  and  yet  I  am  afraid 
that  the  first  Producer  pays  it  likewise,  so  that  in  the  Event  'tis  twice  paid." 
—  Some  Thoughts  on  the  Interest  of  Money  in  General,  and  particularly  in  the 
Publick  Funds,  With  Reasons  for  Fixing  the  same  at  a  lower  Rate,  in  both  In- 
stances, 7uith  Regard  especially  to  Landholders.  London,  n.d.,  p.  93.  This  work, 
as  appears  from  internal  evidence,  was  published  between  1728  and  1739.  The 
quotations  are  made  from  the  second  edition. 

^  "The  Custom  in  some  Places,  I  may  say  in  some  Countries,  is  to  throw  it  on 
the  Owners,  and  they  discount  it  as  regularly  as  they  do  the  Land  Tax."  —  Ibid., 
p.  94. 

2  "  Since  the  Pretext  of  the  Duty,"  he  adds,  "  is  so  good  a  Handle  to  beat 
down  the  Price  of  them  in  the  Hands  of  the  first  Producer."  —  Ibid.,  p.  95. 

8  Ibid.,  p.  95. 

*  A  Revieiu  of  the  Excise- Scheme ;  in  Ans^uer  to  a  Pamphlet,  intitled  The  Rise 
find  Fall  of  the  late  projected  Excise,  impartially  considered.  [By  Pulteney  ?] 
London,  1733,  p.  22. 

5  A  candid  Ansiver  to  a  Letter  from  a  Member  of  Parliament  to  his  Friends 
in  the  Country  concerning  the  Duties  on  Wine  and  Tobacco.     London,  1733,  p.  35. 


Those  who  favor  a  Single    Tax  on  Land       107 

the  excise  controversy,  by  Vanderlint,  with  whose  views  on 
the  subject  of  the  workingman  "we  have  already  become 
acquainted. 1 

Vanderlint  contends  that  if  all  the  existing  taxes  were 
suddenly  to  be  abolished  and  to  be  replaced  by  a  tax  on  rea' 
estate,  the  benefit  would  still  inure  to  the  landowner.  His 
argument  is  as  follows :  prices  of  commodities,  when  freed 
from  taxation,  either  will  remain  the  same  or  will  fall.  If 
they  remain  the  same, — assuming  also  that  there  has  been 
no  change  in  the  money  supply, — the  cost  of  production 
will  decrease,  because  of  the  abolition  of  the  tax  on  the  pro- 
ducers. The  difference  between  cost  and  price,  however,  is 
rent.  Hence,  the  only  result  will  be  to  increase  the  rent 
of  the  landowner.^  On  the  other  hand,  if  the  prices  fall, 
demand  will  increase.  But,  since  all  commodities,  in  last 
resort,  come  from  the  land,  this  increased  demand  means 
higher  rent.^  Thus,  from  either  point  of  view,  remission  of 
taxes  redounds  to  the  welfare  of  the  landlord.  In  other  words, 
the  incidence  of  all  taxes  is  on  the  land.  Vanderlint  accord- 
ingly proposed  a  single  tax  on  land,  as  at  once  far  cheaper 
and  far  better  than  the  existing  complicated  and  inconven- 

^  Money  answers  all  Things,  etc.  By  Jacob  Vanderlint.  London,  1734. 
For  the  full  title,  see  above,  p.  58. 

2  "  Suppose  the  Cash,  amongst  the  People  in  general,  to  be  what  it  now  is ; 
and  that  all  the  Taxes  were  taken  off  Goods  ;  it's  evident,  this  would  not,  in  the 
End,  lower  the  Price  of  Goods  to  the  Consumers ;  since  that  Price  .  .  .  depends 
on  the  Quantity  of  Money  circulating  amongst  the  People  :  But  if  the  Duties 
were  taken  off  Goods,  they  must  cost  as  much  less  than  they  do  now,  as  the  Taxes 
now  on  them  .  ,  .  now  enhance  them  ;  therefore,  I  think,  if  the  Taxes  were  taken 
off  Goods  and  laid  on  Lands  and  Houses  only,  so  much  more  Money  must  in  this 
Case  come  to  the  Hands  of  the  Farmers  for  the  Produce  of  the  Ground,  as  would 
enable  them  to  pay  as  much  larger  Rents."  —  Ibid.,  pp.  112,  113. 

^"If  the  Taxes  were  taken  off  Goods,  they  would  come  Cheaper,  and  Cheap- 
ness would  increase  the  Consumption,  as  Cheapness  of  ever)'thing  always  doth  ; 
and  that  Increase  of  the  Consumption  would  increase  the  Demand  for  those 
Things.  Now  since  everything  is  the  Produce  of  the  Ground,  the  Demand  for  the 
Produce  would  increase  the  Demand  for  Land,  and  that  would  necessarily  raise 
the  Rent,  even  till  all  the  Money  now  i)aid  for  Taxes,  together  with  all  the  Charge 
they  are  necessarily  attended  with,  would  come  into  the  Landlords  Pockets  for 
Rent."  —  Ibid.,  p.  114. 


io8  Shifting  and  Incidence  of  Taxation 

lent  taxes,   which  after   all,   in    his  opinion,   finally   fall   on 
land. 

This  view  of  the  incidence  of  taxation  occasionally  appeared 
in  subsequent  decades.  Thus,  during  the  forties,^  one  writer 
seeks  to  prove  at  some  length  that  not  only  do  "  Taxes  laid 
upon  our  Home  consumption  centre  chiefly  in  the  Land- 
owner," but  "  the  same  must  be  true  of  the,  any  other  way, 
advanced  Price  of  the  Necessaries  of  Life."  Another  writer 
of  the  same  date  states  :  "  It  is  now  no  longer  a  Question  ;  all 
men  are  convinced,  and  see  clearly,  that  all  Taxes  ...  do 
either  immediately,  mediately,  or  ultimately,  fall  upon  the 
Land-Holder."  2  The  same  doctrine  was  again  presented  to 
the  English  public,  although  in  an  alleged  translation  from 
the  French,  as  late  as  the  decade  immediately  preceding 
Adam  Smith,  in  the  following  statement :  "  Since  the  time 
of  that  great  metaphysical  legislator,  Locke,  it  is  an  acknowl- 
edged and  adopted  principle  of  all  who  reflect  with  any  per- 
spicuity, that  the  weight  of  every  tax  upon  consumption, 
ultimately  falls  and  sets  heavy  on  the  proprietors  of  the  soil."  ^ 
It  was  advanced,  almost  for  the  last  time,  a  few  years 
later  by  a  writer  with  the  following  introductory  passage  : 
"  From  thus  tracing  the  operations  of  a  tax  laid  on  trade  and 
labour,  it  may  be  well  worth  observing  in  what  manner  it  is 
made  to  fall  back  again  upon  the  lands  with  increased  weight, 
as  it  will  serve  to  demonstrate  the  accuracy  of  Mr.  Locke's 
judgment."*     This   confidence  was  shared  by  few  writers, 

1  The  State  of  our  Wool  and  Woollett  Trade  Reviewed.  Wherein  some  Objec- 
tions to  the  Grasier's  Advocate  are  consider'' d,  etc.     London,  1 743,  p.  47. 

2  The  Axe  {once  more)  laid  to  the  Root  of  the  Tree,  etc.  London,  1743,  p.  6. 
For  the  full  title,  as  well  as  for  some  other  views  of  the  author,  see  above,  p.  71. 

^  A  General  View  of  England ;  Respecting  its  Policy,  Trade,  Commerce,  Taxes, 
Debts,  Produce  of  Land,  Colonies,  Manners,  etc.,  etc.  Argumentatively  stated 
from  the  Year  iboo,  to  J762 ;  In  a  Letter  to  A.  M.  L.  C.  D.  By  M.  V.  D.  M. 
[M.  Vivant  de  Mezagnes.]  Now  translated  from  the  French,  first  printed  in 
1762.     London,  1766,  p.  17.     QC  p-  200. 

*  Considerations  on  the  Effects  which  the  Bounties  granted  on  exported  Corn, 
Mali  and  Flour,  have  on  the  Manufactures  of  the  Kingdom  and  the  true  Inter- 
ests of  the  State.  London,  1768,  p.  32.  The  author  is  opposed  to  the  en- 
tire bounty  system.     One  of  the  earliest  criticisms  of  bounties  will  be  found  in 


Those  who  favor  a  Single   Tax  on  Land      109 

largely  for  reasons  which  were  nowhere  more  vigorously  put 
than  by  an  author  who  characterized  the  doctrine  as  "  most 
apparently  and  demonstrably  false."  "  If  a  Tax  is  laid  on 
Soap,"  he  asks,  "  is  no  body's  Linnen  wash'd  but  the  Land- 
Owner's  ?  Or  if  a  Tax  is  laid  on  Leather,  does  every  body 
walk  barefoot  but  the  Land-Owner?"  "No  Proposition  in 
Euclid,"  he  adds,  "can  be  clearer  than  that  by  taxing  the 
Land,  when  you  cannot  tax  the  Funds,  you  tax  but  one  of 
them ;  and  that  if  you  tax  the  Things  they  equally  use  and 
consume,  you  tax  them  both."  ^ 

Ill-judged  Bounties  tend  to  Beggary  on  both  Sides  :  or  Observations  on  a  Paper 
intituled  Reasons  for  laying  a  Duty  on  French  and  Spanish  Indico  and  grant- 
ing a  Bounty  on  what  is  made  in  the  British  Plantations.  London,  1748, 
esp.  pp.  II-I2. 

^  A  Letter  to  a  Country  Gentleman  on  the  Revenue  0/ the  Salt  Duty.     London, 
1732,  pp.  25-26. 


CHAPTER   VI 
Those  who  favor  a  More  Eclectic  System 

For  some  time  after  Locke's  theory  of  the  single  tax  on 
land  had  been  propounded,  there  was  but  little  opposition 
either  to  the  scheme  or  to  the  theory  of  incidence  on  which 
it  was  based.  This  was  no  doubt  owing  to  the  fact  that  the 
plan  was  never  seriously  considered  by  the  political  leaders. 
But  when  Walpole  put  forward  his  excise  scheme,  the  prob- 
lem of  incidence  became  a  burning  question.  Several  writ- 
ers not  only  denied  the  general  theory  of  the  shifting  of  all 
taxes  to  land,  as  we  have  just  seen,  but  maintained  that  the 
land  tax  itself  did  not  rest  on  the  land. 

Walpole  himself  is  supposed  to  have  been  the  author  of  a 
tract  in  which  the  theory  is  advanced  that  a  tax  on  land  is 
shifted  to  the  consumer.  "The  Land-tax,"  he  says,  "falls 
heavily  upon  the  People,  by  heightning  the  Rents  of  Lands, 
and  consequently  of  Bread  and  Drink,  and  other  Food :  So 
that  what  the  Land  pays,  the  People  too  pay."^  Another 
writer  who  favors  the  excise  thinks  that  "  where  the  Land  is 
not  Taxed,  doubtless  the  Charge  of  Pasturage,  and  the  Price 
of  Provisions,  will  be  less  in  proportion."  ^  He  considers  the 
reduction  of  the  land  tax  desirable  for  other  reasons  also, 
because  "even  the  Labourer  will  find  it  for  his  Benefit; 
since,  according  to  that  Money  which  the  Landed  Man  can 
spare,  the  Labourer  will  be  employed."^ 

1  Some  General  Considerations  concerning  the  Alteration  and  Improvement  of 
Publick  Revenues.     [By  Sir  Robert  Walpole.]     London,  1733,  p.  9. 

2  A  Letter  to  a  Freeholder  on  the  Late  Reduction  of  the  Land  Tax  to  One  Shil- 
ling in  the  Pound.    By  a  Member  of  the  House  of  Commons.     London,  1732,  p.  21. 

3  Ibid.,  p.  39.  The  author  favors  a  tax  on  salt  for  the  following  remarkable 
reason :  "  All  Men  use  Salt  in  proportion  to  their  Ability,  but  all  Men  do  not  hold 

no 


Those  who  favor  a  More  Eclectic  System      1 1 1 

The  fullest  expression  of  this  view  is  found  in  the  work  of 
an  anonymous  pamphleteer  who  addressed  himself  primarily 
to  the  question  of  incidence.^  He  opposes  the  taxation  of 
land,  and  incidentally  favors  the  excise  scheme,  because  the 
land  tax  is,  in  his  opinion,  shifted  to  the  consumer.  The 
smaller  the  land  tax,  the  lower  will  be  the  price  of  provisions. 
This  means  lower  money  wages  for  the  workman,  and  this, 
again,  will  enable  the  employer  to  compete  with  foreigners.^ 

In  another  passage,  the  author  states  outright  that  "a 
Land-Tax,  which  affects  all  the  common  Necessaries  of  Life 
of  our  own  Production,  is  an  actual  general  Excise,  in  the 
strict  Sense  of  the  Words."  He  therefore  favors  a  scheme 
like  Walpole's,  because  "  it  is  a  particular  Excise  upon  foreign 
Superfluities  and  Luxuries,  with  a  View  to  take  off  a  general 
Excise  from  the  common  Necessaries."  ^  Later  on,  again, 
the  author  tries  to  show  in  considerable  detail  how  a  tax  on 
land  will  raise  the  price  of  all  manufactured  products,  as  well 
as  of  the  produce  of  the  soil.  He  concludes  that  "  whatever 
Tax  be  laid  upon  Land,  the  Rents  and  Produce  thereof  will 

Land  :  to  Multitudes  of  the  former,  there  are  very  few  of  the  latter  ...  Is  it  not 
then  much  more  equal  and  righteous  that  we  should  tax  every  Man  a  little  in  pro- 
portion to  his  Ability,  than  that  we  should  tax  a  very  few  Men  in  a  great  Degree, 
far  beyond  the  Proportion  of  their  Ability  ?  "  —  A  Letter  to  a  Freeholder,  pp.  28, 
29.  A  somewhat  similar  defence  of  the  salt  duty  is  found  in  another  tract  entitled 
A  Vindication  of  the  Conduct  of  the  Alinistry,  in  the  Scheme  of  the  Excise  on  Wine 
and  Tobacco,  etc.,  etc.  London,  1734.  The  author  favors  the  salt  tax:  "first 
that  Duty  is  payed  universally  over  the  whole  Nation  and  that  it  costs  but  little  to 
every  one  in  particular."  —  Ibid.,  p.  57. 

^  Englishmen^ s  Eyes  opened ;  or  All  made  to  SEE,  who  are  not  resolved  to  be 
BLIND :  Being  the  Excise  Controversy  set  in  a  new  Light ;  completely  discuss' d 
upon  the  just  Principles  of  Reasoning,  and  brought  to  a  fair  and  demonstrative 
Conclusion  :  between  a  Landholder  and  a  Merchant.     London,  1733. 

*  "  By  easing  the  Land,  the  Price  of  all  the  common  Necessaries  and  Con- 
veniencies  of  Life  become  cheaper  ;  .  .  .  when  a  Land-Tax  is  taken  ofl',  Land- 
lords may  afford  to  ease  their  Tenants,  and  they  of  course  will  ease  the  Poor  in  the 
Price  of  the  Production  of  their  Lands.  The  Poor,  when  they  can  live  cheaper, 
will  work  cheaper;  and  our  Manufactures  will  consequently  be  exported  cheaper." 
—  Ibid.,  p.  7. 

*  "  Far  from  having  a  Tendency,"  he  continues,  "  to  what  the  Judicious  under- 
stand by  a  general  Excise,  no  Step  could  possibly  be  taken  more  effectually  to  free 
us  from  a  general  Excise."  —  Ibid.,  p.  15. 


1 1 2  Shifting  and  Incidence  of  Taxation 

be  in  a  continual  Flux  of  Raising,  till  the  Landlord  finds  his 
Gains  to  be  as  great  after  the  Deduction  of  that  Tax,  as 
before  it  was  imposed."^  He  discusses  at  some  length  the 
argument  of  "  Mr.  Lock,"  but  thinks  that  "  gentlemen  have 
wrested  the  Sense  of  this  great  Author,  and  made  him  speak 
their  Sentiments,  not  his  own."  ^ 

These  writers,  as  we  have  seen,  opposed  the  land  tax, 
because,  among  other  defects,  it  was  shifted  to  the  consumer. 
But  others  who  held  the  same  doctrine  of  incidence  drew 
precisely  the  opposite  conclusion,  favoring  the  land  tax  and 
trying  to  make  it  popular  with  the  farmers  and  with  the  land- 
owning legislators,  just  because  it  would  not  fall  on  them. 
Thus  the  author  of  an  interesting  tract  ^  thought  that  the 
landlords  raised  their  rents  by  the  amount  of  the  land  tax, 
but  that  the  farmers  did  not  suffer,  because  they  simply 
added  the  tax  to  the  price  of  their  products,  the  weight  of 
the  tax  thus  resting  at  last  on  the  consumer.* 

The  theory  that  the  land  tax  is  shifted  to  the  consumer  was, 
as  we  know,  a  favorite  doctrine  of  Petty. ^  It  ran  counter, 
however,  not  only  to  the  popular  understanding,  but  to  the 
ideas  of  most  of  the  writers  that  discussed  the  land  tax,  who 
opposed  or  favored  it  according  to  their  views  as  to  the  desir- 
ability of  taxing  the  landowner.     Thus,  in  the  seventeenth 

^  Englishmen's  Eyes  Opened,  p.  54.  2  JUJ^^  p.  57, 

8  The  Nature  of  the  Present  Excise,  and  the  Consequences  of  its  farther  Exten- 
sion, examined.  In  a  Letter  to  a  Member  of  Parliament.  London,  1733.  The 
author  is  noteworthy  as  being  one  of  the  first  to  propound  the  capitalization 
theory  of  the  land  tax.     See  below,  book  ii,  chap.  iv. 

^  "  All  the  Gentlemen  .  .  .  have  had  frequent  opportunities  of  re-setting  their 
Lands,  and  have  indemnified  themselves  by  raising  their  Rents.  The  Farmers 
themselves  have  not  felt  it  much,  because  they  have  raised  the  Price  of  Pro- 
visions likewise  in  Proportion,  as  their  Landlords  have  raised  their  Payments  ; 
so  that  the  greatest  Burthen  has  lain  all  along  upon  the  Consumer,  who  in  Nine 
Instances  out  of  Ten,  is  a  Labourer  or  Manufacturer." — Ibid.,  p.  38.  The  same 
doctrine  was  expounded  later  on  in  the  work  entitled  Manufactures  Improper 
Subjects  of  Taxation.  Addressed  to  the  Merchants  and  Manufacturers  of  Great 
Britain  ;  being  an  Attempt  to  prove  that  the  Riches  and  Power  of  the  Nation 
depend  in  a  great  degree  upon  Manufactures  being  free  from  all  Taxation. 
Pluck  the  Fruit  but  do  not  injure  the  Root  of  the  Tree.     London,  1785,  esp.  p.  34. 

*  See  above,  p.  31. 


Those  who  favor  a  More  Eclectic  System      1 1  3 

century,  one  pamphleteer  strongly  upheld  the  land  tax,^ 
while  Reynell  as  vigorously  objected  to  it,^  but  neither 
imagined  for  a  moment  that  the  tax  would  not  rest  where 
it  was  imposed. 

Again,  at  the  time  of  the  excise  scheme  most  of  those  who 
favored  the  excise  did  so  because  they  desired  to  relieve  land 
from  the  burdens  resting  on  it.  As  one  of  the  writers  put 
it :  "A  Tax  imposed  upon  Land,  is  utterly  unavoidable.  Let 
a  Freeholder  be  in  narrow  circumstances,  let  him  have  a  large 
Family,  let  him  be  a  frugal  Man,  or  let  his  Case  be  what  he 
will,  he  cannot  help  himself  by  any  Abatement  of  this  Charge 
upon  his  Income.  Such  an  Estate  is  loaded  with  such  a  Bur- 
den, which  no  Management  can  lighten."^ 

With  the  greater  diversity  of  taxation  in  the  eighteenth 
century,  the  controversies  over  the  incidence  of  taxation  soon 
covered  more  ground  than  the  land  tax.     With  this  widening 

^  "  It  is  humbly  offered  and  submitted,  whether  there  can  be  any  way  in  the 
World  found,  more  certain,  equal,  and  easie,  to  raise  the  same  (Money),  than  by 
a  Land-Tax :  for  then  they  will  know  what  it  is  they  give,  when  and  how  cer- 
tainly it  will  come  in,  and  the  time  when  the  same  will  end."  —  The  Grand  Con- 
cern of  England ;  explained  in  several  Proposals  offered  to  the  Consideration  of 
the  Parliament.  By  a  Lover  of  his  Countrey  and  Well-wisher  to  the  Prosperity 
both  of  the  King  and  Kingdoms.     London,  1673,  p.  3. 

2  "  Taxes  were  better  raised  any  way  than  from  the  Land,  for  that  drains  Money 
out  of  the  Country  which  seldom  or  never  returns  .  .  .  There  might  be  waies 
found  out,  that  no  Taxes  might  ever  be  laid,  on  the  substantial  part  of  the  Nation, 
Country,  or  City,  Land,  or  Houses."  —  The  True  English  Interest,  or  an  Account 
of  the  Chief  Natural  Improvements.  By  Carew  Reynell.  London,  1674,  chap. 
25  :  "  Kings  Revenue,  Taxes,  Customs,"  pp.  68,  69.  His  scheme  was  to  lay  a  tax 
"  only  on  the  vices  of  the  People,  as  on  all  Taverns,  Ale  Houses,  Foreign  Needless 
Commodities  and  on  debauched  persons."  To  this  he  added  a  tax  on  bachelors, 
and  high  customs  duties  which  he  thought  would  be  paid  by  the  foreigner. 

*  A  Letter  to  the  Free-holders  of  Great  Britain.  London,  1733,  p.  27.  "But 
Wine  and  Tobacco,"  he  adds,  "  are  things  of  quite  another  Kind  ...  A  Man 
may  cither  live  comfortably  without  them,  or  lessen  his  Expences  in  them,  as  he 
sees  convenient."  Cf  for  similar  views  as  to  the  land  tax  A  letter  from  a  Mem- 
ber of  Parliament  for  a  Borough  in  the  West,  to  a  Noble  Lord  in  his  Neighbour- 
hood there,  concerning  the  Excise-Bill  and  the  Manner  and  Causes  of  Losing  it. 
London,  1733,  p.  27.  See  also  The  Rise  and  Fall  of  the  late  Projected  Excise, 
impartially  consider' d.  By  a  Friend  to  the  English  Constitution.  London,  1733, 
pp.  13,  15,  27. 


114  Shifting  and  hicidencc  of  Taxation 

of  the  field,  the  opposition  to  Locke's  theory  of  the  single  tax 
grew  apace.  Nugent,  for  example,  the  author  of  a  widely 
read  monograph,  maintains  that  "  Mr.  Locke's  position,  taken 
in  its  full  extent  and  without  any  limitations,  is  greatly  contro- 
vertible," and  "  that  the  maxim  seems  to  go  farther  than 
reason  and  experience  will  warrant."^  He  does  not  object  to 
the  statement  that  a  tax  laid  upon  farmers'  produce  "  makes 
people  less  forward  to  buy  "  ;  but  he  does  not  see  "  why  that 
reason  should  not  have  the  same  operation  upon  other  com- 
modities." The  demand  for  commodities,  he  thinks,  depends 
"  on  the  quantity  of  money  subsisting  in  the  market " ;  and 
if  this  quantity  is  unchanged,  an  increased  tax  on  the  general 
trader  must  diminish  mercantile  profits.^  The  same  argu- 
ment which  proves  that  a  land  tax  cannot  be  shifted  equally 
shows  that  a  tax  on  traders'  profits  can  likewise  not  be  shifted. 
Nugent,  however,  makes  one  notable  exception,  maintaining 
that  it  is  useless  to  try  to  tax  "  moneyed  men "  on  their 
personal  property.  For,  says  he,  taxes  on  mortgages  or  on 
the  public  funds  would  be  shifted  to  the  mortgagor  or  to 
the  public,  respectively,  through  a  corresponding  increase 
in  the  rate  of  interest.^  Finally,  he  objects  to  any  further 
increase  of  the  excise  taxes,  opposing  the  view  that  higher 
taxes  will  induce  the  poor  to  work.*  Therefore,  while  he 
is  confessedly  not  an  advocate  of  any  single  tax  on  land,  he 
objects  to  a  lowering  of  the  land  tax,  which  would  involve 
a  further  increase  in  the  taxes  on  trade  and  commodities. 

1  Considerations  upon  a  Reduction  of  the  Land  Tax.  [By  Robert  Nugent.] 
London,  1749,  p.  9. 

"^  "  And  if  additional  taxes  be  laid,  while  the  money,  with  which  commodities 
are  to  be  purchased,  remains  unincreased,  the  traders  must  be  contented  with 
smaller  gains,  or  not  trade  at  all.  And  the  first  part  of  the  alternative  will  always 
be  the  case,  where  the  profits  of  a  flourishing  trade  may  well  support  some  diminu- 
tion." —  /did.,  p.  14. 

^  "  Were  mortgages,  or  the  funds,  to  be  taxed,  matters  would  not  be  mended. 
For,  as  taxes,  wherever  placed,  can  have  no  tendency  to  lower  the  interest  of 
money;  they,  who  buy  into  the  funds,  would  buy  so  much  cheaper  as  the  tax 
would  amount  to,  and  the  lender  upon  mortgages  insist  upon  a  higher  rate  oi 
interest."  —  /did.,  p.  25. 

*  See  above,  p.  58. 


Those  who  favor  a  More  Eclectic  System     i  i  5 

In  a  later  monograph  Nugent  returns  to  the  charge  and 
speaks  of  the  absurdity  of  those  who  "  contend  for  an  Abate- 
ment of  that  Tax,  preferable  to  all  others,  the  cheapest  levied, 
producing  most,  and  the  least  felt,  of  any.  And  such,  incon- 
testably,  is  the  Land-tax ;  which,  bating  the  Word,  affects 
that  Interest,  which  opposes  it  strongest,  less,  than  any  other 
Tax  in  like  Proportion  of  Quantity  and  neat  Produce."  ^ 

The  general  doubt  as  to  the  truth  of  Locke's  theory  is 
seen  in  a  number  of  other  works.  Thus  an  anonymous  writer 
of  about  the  same  period  maintains  that  the  existing  taxes 
affect  not  only  the  landowner,  but  also  the  laborer  and  the 
trader.^  In  former  times,  he  says,  "  when  taxes  were  very 
moderate,  because  they  were  so,  the  necessaries  of  Life  were 
cheap  ;  Labour  was  so.  The  consequence  of  which  was,  that 
we  were  enabled  to  work  up  our  Manufactures  so  moderately 
cheap  as  to  command  most  of  the  Markets  of  the  World."  ^ 
A  little  later  Postlethwayt  refers  to  the  opposition  to  Locke's 
theory,  without  attempting,  however,  to  give  his  reasons.* 
Another  writer  refers  more  specifically  to  Locke's  doctrine 
that  taxes  on  commodities  are  indirect  taxes  on  land.^  This 
he  thinks  a  mistake,  not  only  because  wages  do  not  rise  pro- 
portionately with  taxes  on  labor,  but  also  because  trade  is 
able  to  shift  the  burden  of  taxes  to  the  consumer.     It  is 

^  Further  Considerations  upon  a  Reduction  of  the  Land- Tax  :  Together  with  a 
State  of  the  Annual  Supplies  of  the  Sinking  Fund,  and  of  the  National  Debt,  at 
various  future  Periods,  and  in  various  Suppositions.  [By  Robert  Nugent.]  Lon- 
don, 1751,  pp.  90,  91. 

^  Britannia  in  Mourning :  or  a  Review  of  the  Politicks  and  conduct  of  the 
Court  of  Great  Britain  with  Regard  to  France,  the  Ballance  of  Power,  and  the 
True  Interest  of  these  A^ations  .  .  .  and  likewise  a  View  of  the  present  State  of 
our  Liberties  and  Trade,  compared  with  what  they  have  been,  etc.  In  a  Dialogue 
between  two  ancient  Patriot  Englishmen,  commonly  known  by  the  names  of,  Jest 
and  Earnest.     London,  1742. 

*  Ibid.,  pp.  13,  14. 

*  "If  Mr.  Locke's  Observation,  that  all  Taxes  in  general  ultimately  terminat- 
ing upon  landed  {sic')  should  be  exceptionable,  as  some  think  it,  yet,"  etc. — 
Great  Britain^ s  True  System,  etc.  By  Malachy  Postlethwayt.  London,  1757, 
p.  306. 

°  Considerations  on  the  Policy,  Commerce  and  Circumstances  of  the  Kingdom. 
London,  1771,  chap,  viii :  "On  Taxes,"  p.  60. 


1 1 6  Shifting  and  Incidence  of  Taxation 

the  workman,  not  the  landowner,  upon  whom  the  weight 
finally  rests. ^ 

The  most  famous  opponents  of  the  single  tax  on  land, 
however,  were  the  two  chief  economists  of  the  third  quarter 
of  the  eighteenth  century,  Hume  and  Steuart.  Hume  attacks 
Locke's  doctrine  on  the  ground  that  every  one  tries  to  shift 
the  tax  to  some  one  else ;  and  that  there  is  no  reason  to  sup- 
pose that  the  landowners  are  weaker  in  this  respect  than 
other  classes  of  society.  "  Every  man,  to  be  sure,"  says 
Hume,  "  is  desirous  of  pushing  off  from  himself  the  burthen 
of  any  tax,  Avhich  is  impos'd,  and  laying  it  upon  others  :  But 
as  every  man  has  the  same  inclination,  and  is  upon  the  de- 
fensive ;  no  set  of  men  can  be  suppos'd  to  prevail  altogether 
in  this  contest.  And  why  the  landed  gentlemen  shou'd  be 
the  victim  of  the  whole,  and  shou'd  not  be  able  to  defend 
himself,  as  well  as  others  are,  I  cannot  readily  imagine."'^ 
Hume  thinks  that  the  principle  "  tho'  first  advanc'd  by  a  cele- 
brated writer,  has  so  little  appearance  of  reason,  that  were  it 
not  for  his  authority,  it  had  never  been  receiv'd  by  anybody." 

In  another  celebrated  passage,  Hume  discusses  the  maxim 
of  the  "  ways  and  means  men,"  which  he  accepts  in  part 
"  that  every  new  tax  creates  a  new  ability  in  the  subject  to 
bear  it."     He  points  out  that  the  consequences  of  laying  a  tax 

1  "  Mr.  Locke  was  of  opinion,  that  taxes  upon  commodities  affect  the  landed 
interest  more  than  if  laid  directly  upon  land;  which  would  be  a  good  deal  the 
case,  if  the  prices  of  labour  were  raised  proportionally  to  the  increase  of  taxes; 
but  that  has  not  been  done  in  this  country.  There  is  indeed  no  taxing  oi  traders 
in  the  articles  of  their  traffic,  because  they  are,  and  ever  will  be,  the  raters  of  the 
values  of  their  own  commodities :  so  that  experience  shews,  for  a  small  tax  laid 
on  any  thing  they  deal  in,  they  will  make  a  large  consideration  in  price.  Thus 
those  whose  single  commodity  is  labour;  are  taxed  by  government,  directly  for 
their  windows,  for  statute-work  and  most  commodities  they  consume,  and  they  are 
indirectly  taxed  by  land-owners  in  the  increase  of  farm-rents,  because  the  farmer 
raises  proportionally  the  prices  of  his  commodities;  while  other  dealers  add  to  the 
taxes  that  are  laid  on  the  commodities  they  sell,  another  to  themselves  in  the 
prices  which  they  exact;  without  workmen  having  any  advance  in  their  own 
wages  that  is  equivalent."  —  Ibid.,  pp.  60—62. 

-  Political  Discourses.  By  David  Hume,  Esq.  Edinburgh,  1752.  Chap,  viii: 
"Of  Taxes,"  p.  121.  The  quotations  are  from  the  second  edition,  published  in 
the  same  year. 


Those  who  favor  a  More  Eclectic  System     117 

on  commodities  consumed  by  the  common  people  are  ordi- 
narily supposed  to  be  a  diminution  of  wages  so  that  the  laborer 
bears  the  burden  himself,  or  an  increase  of  wages  whereby 
the  burden  is  shifted  to  the  employer.  "But,"  he  adds, 
"  there  is  a  third  consequence,  which  very  often  follows  upon 
taxes,  viz.,  that  the  poor  encrease  their  industry,  perform 
more  work,  and  live  as  well  as  before,  without  demanding 
more  for  their  labour."^ 

Hume  here  seems  to  share  the  opinion  already  discussed,^ 
that  taxes  act  as  a  spur  to  industry.  But  if  his  reasoning  be 
attentively  considered,  ft  will  be  seen  that  he  is  not  willing  to 
push  the  theory  very  far.  For  in  the  first  place,  he  limits 
the  doctrine  to  taxes  other  than  those  imposed  upon  neces- 
saries of  life;  and,  secondly,  even  as  to  these  he  is  doubtful. 
"  This  doctrine,"  he  tells  us,  "  may  be  admitted  in  some  de- 
gree :  But  beware  of  the  abuse.  Exorbitant  taxes,  like 
extreme  necessity,  destroy  industry,  by  engendring  despair; 
and  even  before  they  reach  this  pitch,  they  raise  the  wages 
of  the  labourer  and  manufacturer  and  heighten  the  price  of 
all  commodities.  An  attentive,  disinterested  legislature  will 
observe  the  point,  where  the  emolument  ceases,  and  the 
prejudice  begins."^ 

The  fullest  discussion  of  the  incidence  of  taxation  before 

1  «<  Where  taxes  are  moderate,"  he  goes  on  to  say,  "  and  affect  not  the  necessa- 
ries of  life,  this  consequence  naturally  follows  ;  and  'tis  certain  that  such  diffi- 
culties often  serve  to  excite  the  industry  of  a  people,  and  render  them  more 
opulent  and  laborious  than  others,  who  enjoy  the  greatest  advantages."  —  Politi- 
cal Discourses,  p.  1 15. 

■^  Above,  pp.  48-55. 

'^  Ibid.,  p.  118.  Bastable,  Public  Finance,  book  iii,  chap,  ii,  §  3  (3d  ed.,  p. 
284),  scarcely  does  Hume  justice  in  making  him  appear  as  a  partisan  of  the  doc- 
trine.—  Somewhat  analogous  to  the  doctrine  that  taxes  on  production  are  a  spur 
to  industry,  is  the  theory  that  taxes  on  consumption  increase  the  quantity  of  com- 
modities consumed.  We  find  this  theory,  not  indeed  in  its  extreme  statement, 
but  in  a  modified  form,  formulated  by  Arthur  Young  as  follows :  "  Render  any 
thing  by  taxes  something  more  of  a  distinction  than  formerly,  and  you  will  tind 
that  the  tax,  instead  of  checking,  will  increase  the  consumption."  Political 
Arithmetic,  1774,  p.  217.  The  same  observation  is  found  in  the  anonymous 
pamphlet  fm/uiry  into  the  Connection  between  the  Size  0/ Farms  and  the  present 
Price  of  Provisions.     London,  1773. 


1 1 8  Shiftmg  and  Incidence  of  Taxation 

Adam  Smith  is  to  be  found  in  the  works  of  Sir  James  Steuart.^ 
He  divides  all  taxes  into  three  kinds,  —  proportional,  cumu- 
lative and  personal.  Proportional  taxes  are  those  that  fall 
upon  expense  (what  we  should  call  indirect  taxes);  cumulative 
or  arbitrary  taxes  are  those  that  affect  property ;  and  per- 
sonal taxes  are  those  that  consist  of  personal  services.^  Pro- 
portional taxes,  he  says,  are  always  "drawn  back"  (that  is, 
shifted)  by  the  industrious  consumer.  Steuart  thinks  a  con- 
sumer "industrious"  in  all  cases,  except  when  the  "consump- 
tion made  by  the  latter  is  an  article  of  superfluity."  In  other 
words,  taxes  on  the  necessaries  of  life  are  shifted  from  wage- 
earner  to  employer  because  the  wage-earner  is  a  "  physical 
necessarian"  who  accumulates  no  profits  ;^  but  if  the  laborer 
spends  his  money  on  taxable  articles  which  other  members  of 
his  class  do  not  use,  he  cannot  shift  the  tax. 

Steuart  illustrates  this  point  as  follows :  "  A  tanner  sells 
his  leather  to  a  shoemaker;  the  shoemaker,  in  paying  the 
tanner  for  his  leather,  pays  the  tanner's  subsistence  and  profit, 
and  the  tax  upon  leather.  The  man  who  buys  the  shoes  for 
his  own  consumption,  refunds  all  this  to  the  shoemaker, 
together  with  his  subsistence,  profit,  and  the  tax  upon  shoes ; 
consequently,  the  price  of  shoes  are  {sic)  raised,  only  by  refund- 
ing the  taxes  paid  by  the  industrious.  But  if  the  shoemaker's 
subsistence  shall  happen  to  include  either  tavern  expences, 
or  his  consumption  on  idle  days,  he  will  not  draw  these  back ; 
because  other  shoemakers  who  do  not  frequent  the  tavern, 
and  who  are  not  idle,  will  undersell  him."     All  proportional 


1  An  Inquiry  into  the  Principles  of  Political  CEconomy  :  being  an  Essay  on 
the  Science  of  Domestic  Policy  in  Free  Nations.  By  Sir  James  Steuart,  Bart. 
London,  1767,  book  v,  chaps,  iii-vi,  "Of  Taxes,  and  of  the  proper  application  of 
their  amount."  In  the  edition  of  his  Collected  Works,  published  in  six  volumes 
in  1805,  the  subject  is  contained  in  vol.  iv.  The  quotations  here  are  from  the 
original  quarto  edition,  vol.  ii. 

2  "  A  proportional  tax  is  that  which  is  levied  upon  the  idle  consumer,  at  the 
time  he  buys  the  commodity."  "  A  cumulative  tax,  is  the  accumulation  of  that 
return  which  every  individual,  who  enjoys  any  superfluity,  owes  daily  to  the  state, 
for  the  advantages  he  receives  by  living  in  the  society."  —  Ibid.,  ii,  p.  500. 

8  Ibid.,  ii,  p.  491. 


Those  who  favor  a  More  Eclectic  System      1 1 9 

taxes,  therefore,  fall  at  last  upon  "  the  rich  and  idle  con- 
sumer of  the  manufacture,  who  can  draw  nothing  back  from 
anybody.  .  .  .  The  whole  reimbursement  of  all  former  pay- 
ments and  repayments  lands  upon  him."  Hence  Steuart 
concludes,  "  How  absurd  therefore,  is  it  either  to  say  that  all 
taxes  fall  ultimately  upon  land  ;  or  as  others,  for  no  better 
reason,  pretend,  that  they  fall  upon  trade."  "  Proportional 
taxes  never  can  fall  either  upon,  or  affect  any  person  but  the 
idle ;  that  is  to  say  the  not  industrious  consumer."  ^ 

With  regard  to  what  he  calls  cumulative  taxes,  Steuart 
lays  down  the  general  rule  that  "the  nature  of  all  these  taxes, 
is,  to  affect  the  possessions,  income  and  profits  of  every  indi- 
vidual, without  putting  it  in  their  power  to  draw  them  back 
in  any  way  whatever ;  consequently,  such  taxes  tend  very 
little  towards  enhancing  the  price  of  commodities."^  These 
taxes  ought,  therefore,  in  his  opinion,  generally  to  be  dis- 
countenanced. Taxes  on  land,  he  thinks,  do  not  augment 
the  price  of  wheat  as  similar  taxes  on  commodities  raise  the 
price  of  excisable  goods ;  for,  if  the  proprietor  were  to  at- 
tempt to  raise  the  price  of  his  grain  in  proportion  to  the  tax, 
his  farmer  who  pays  no  land  tax  would  undersell  him.^  All 
attempts  to  levy  a  tax  on  money,  however,  he  regards  as 
certain  to  fail.  A  tax  on  trade  profits,  again,  although  it 
tends  to  rest  on  profits,  is  not  to  be  recommended,  because, 
"  although  they  appear  to  be  income,  I  rather  consider  them 
as  stock,  which  ought  not  to  be  taxed."*  Stcuart's  final  con- 
clusion is  expressed  in  these  words :  "  I  conclude  that  no 
objection  can  lie  against  proportional  taxes,  so  far  as  they 
affect  the  industrious;  because  they  draw  them  compleatly 
back :  and  that  great  objections  lie  against  cumulative  taxes, 
when  they  affect  the  industrious,  because  they  cannot  draw 
them  back ;  and  consequently,  they  may  affect  the  physical- 
necessary  of  the  contributor,  in  case  no  profit  should  remain 
to  him  upon  his  labour.  On  the  other  hand,  I  think  little 
objection  can  be  made  to  cumulative  taxes,  when  they  are 

^  An  Inquiry  into  the  Principles,  etc.,  ii,  p.  494.      Cf.  ii,  p.  510. 

2  Ibid.f  ii,  p.  496.  8  Jbid.,  ii,  p.  552.  *  Ibid.,  ii,  p.  541. 


I20  Shifliiig  and  Incidence  of  Taxation 

imposed  upon  possessions,  which   produce  a  visible  annual 
revenue,  clear  to  the  proprietors."  ^ 

It  is  clear,  therefore,  that  by  the  third  quarter  of  the 
eighteenth  century  the  economists,  although  differing  among 
themselves,  were  united  in  opposing  Locke's  theory  of  the 
shifting  of  all  taxes  to  land.  It  is  no  wonder  that  Dugald 
Stewart  wrote,  a  few  decades  later,  in  reference  to  the  plan 
of  the  single  tax  on  land  :  "  I  shall  only  remark,  that  the  first 
idea  of  it  was  borrowed  from  this  country,  where  it  has  been 
repeatedly  suggested  by  authors  of  reputation,  although  it 
had  been  almost  forgotten  as  an  exploded  chimera,  when 
it  was  revived  by  the  Economists  of  France."  ^  And  Arthur 
Young  wrote  :  "  I  know  not  whether  Mr.  Locke  were  the 
original  father  of  the  doctrine,  that  all  taxes,  laid  in  any  man- 
ner whatsoever,  fall  ultimately  on  land ;  but  whoever  started 
or  supported  it,  contributed  towards  the  establishment  of  one 
of  the  most  dangerous  absurdities  that  ever  disgraced  com- 
mon sense."^ 

We  have  now  completed  our  examination  of  the  early  liter- 
ature on  taxation.  We  have  limited  ourselves  to  England 
for  two  reasons :  first,  because  most  of  the  fiscal  writings,  as 
well  as  those  on  economics  in  general,  are  to  be  found  in 
England ;  and,  secondly,  because  the  scantier  literature  of 
the  continent  is  very  much  better  known.  The  continental 
literature,  however,  so  far  as  it  discussed  the  incidence  of 
taxation  at  all,  confined  itself  chiefly  to  generalities  on  the 
question  of  direct  versus  indirect  taxation,  and  more  specifi- 

1  Ibid.,  ii,  p.  519. 

"^Lectures  on  Political  Economy  [delivered  in  1800-1801].  Now  first  pub- 
lished. By  Dugald  Stewart.  Edited  by  Sir  William  Hamilton.  Edinburgh, 
1855,  reprinted  1877,  ii,  p.  238. 

*  Travels  in  France.  By  Arthur  Young.  London,  1792,  i,  p.  526.  Young 
adds,  in  reference  to  the  idea  of  the  single  tax:  "Taxes  should  bear  lightly  on 
an  infinite  number  of  points,  heavily  on  none.  In  other  words,  simplicity  in  taxa- 
tion is  the  greatest  additional  weight  that  can  be  given  to  taxes  and  ought,  in 
every  country,  to  be  most  sedulously  avoided."  — i,  p.  531.  In  an  earlier  work. 
Political  Arithmetic,  London,  1774,  Young  discusses  Locke's  theories  at  some 
length.     Cf.  pp.  211  et  seq.     Some  of  the  more  timid  spirits  who  stood  in  great 


Those  who  favor  a  More  Eclectic  System     1 2 1 

cally  to  the  effects  of  the  excise.  In  France  the  two  attempts 
to  develop  a  theory  of  fiscal  reform  that  were  made  by 
Boisguilbert  and  Vauban  ^  met  with  such  little  favor  in  court 
circles  that  a  quietus  was  put  on  the  discussion  of  the  topic 
for  more  than  half  a  century.  In  Germany  the  only  treat- 
ment of  the  subject,  apart  from  the  monotonous  productions 
of  the  "Cameralistic  "  writers,  is  found  in  the  controversial- 
ists on  the  scheme  for  the  general  excise  at  the  close  of  the 
seventeenth  and  the  beginning  of  the  eighteenth  centuries.^ 
In  Italy  the  number  of  authors  was  perhaps  more  numerous, 
but  their  influence  was  small. '^ 

In  our  survey  of  the  English  literature,  we  have  found 
almost  as  many  views  as  there  were  writers.  That  taxes 
remain  where  they  are  imposed,  that  all  taxes  are  shifted  to 
the  landowner,  that  they  are  shifted  to  the  trader,  that  they 
rest  on  the  laborer,  that  they  rest  on  the  rich  consumer,  that 
they  do  not  rest  on  the  consumer  at  all  —  these,  and  varia- 
tions of  these,  doctrines  meet  us  in  bewildering  confusion. 
Yet  even  here  certain  currents  of  thought  may  be  discerned, 
and  the  attempt  has  been  made  in  the  preceding  pages  to 
point  oat  the  general  direction  of  these  currents.  The  great 
weakness  in  all  the  discussions,  however,  was  the  lack  of  any 
consistent  economic  theory  in    general,  and   of  a  theory  of 

awe  of  Locke's  reputation  did  not  dare  to  impugn  the  theory  although  they 
clearly  showed  that  the  facts  were  not  in  harmony  with  it.  Thus  one  writer  says: 
"  The  opinion  of  that  great  man  will  remain  good  in  theory,  but  it  cannot  be 
practical."  —  Half  an  /four's  Ad7>ice  to  Nobody  Knows  Who.    London,  1767,  p.  13. 

^  Boisguilbert  wrote  the  Detail  de  la  France,  1697,  and  Factum  de  la  France, 
1707.  Vauban  wrote  the  Projet  d'une  Dime  Royale,  1707.  Vauban's  work  was 
translated  into  English  under  the  title  An  Essay  for  a  General  Tax:  or  a  Project 
for  a  Royal  Tythe.  By  the  famous  Monsieur  Vauban,  Marshal  of  France,  etc. 
London,  1709.  The  translation  was  widely  read  and  went  through  several 
editions. 

^  For  these  writers  see  "  Der  Accisestrcit  deutscher  Finan/.theoretiker  im  17. 
und  18.  Jahrhundert."  Von  Karl  Th.  von  Inama-Sternegg.  In  the  Tiibinger 
Zcitschrift  fur  die  gesatnmte  Staatswisseusc/taft,  vol.  xxi  (1865),  pp.  514-546. 
Cf.  also  Geschichte  der  National-okonomik  in  Deutschland.  Von  Wilhelm  Roscher. 
Munchen,  1874,  pp.  319-326. 

"  For  these,  see  Storia  delle  Dottriue  Finanztarie  in  Italia.  Dal  Prof.  G. 
Ricca-Salerno.     Roma,  1881  (2d  edition,  1895). 


122  Shifting  and  Incidence  of  Taxation 

distribution  in  particular.  Without  such  a  general  definite 
theory  as  a  basis,  the  whole  superstructure  of  the  doctrine  of 
incidence  was  necessarily  both  slight  and  unstable.  It  was 
reserved  for  the  Physiocrats  and  Adam  Smith  to  formulate 
for  the  first  time  a  consistent  theory  of  distribution  as  the 
very  basis  of  the  new  political  economy,  and  it  is  accordingly 
with  them  that  the  modern  theories  of  the  incidence  of  taxa- 
tion begin.  It  is  these  modern  theories  that  will  now  engage 
our  attention. 


BOOK    II 

THE  MODERN  THEORIES 


CHAPTER  I 
The  Physiocratic  Theory 

The  Physiocratic  theory  of  incidence  was  outlined  by  the 
founder  of  the  sect,  Quesnay ;  it  was  developed  by  Mirabeau  ; 
it  was  discussed  from  all  sides  by  Mercier  de  la  Riviere, 
by  Du  Pont  de  Nemours,  and  by  the  Abbe  Baudeau ;  and 
it  was  finally  completed  by  various  works  of  Turgot.  The 
theory  may  be  summed  up  as  follows :  Agriculture  is  the 
sole  source  of  wealth.  It  is  the  only  productive  employment 
because  it  alone  furnishes  a  prodiiit  net  or  surplus  above  the 
necessary  expenses  of  production.  These  necessary  ex- 
penses the  Physiocrats  call  the  agricultural  advances  or  out- 
lay. They  are  of  two  kinds :  first,  the  primitive  advances 
{avances  primitives),  consisting  of  the  capital  applied  to  land 
in  the  shape  of  implements,  beasts  of  burden,  clearing  and 
preparing  the  soil ;  and  secondly,  the  annual  advances  {avances 
annuelles),  or  the  capital  spent  on  wages  and  on  maintaining 
the  primitive  advances  —  that  is,  in  keeping  the  land,  ani- 
mals and  tools  in  good  condition.  The  gross  product  is 
called  by  them  the  returns  of  agriculture  {reprises  de  la  cul- 
ture); and  after  deducting  from  this  gross  product  the 
annual  advances  plus  the  interest  on  the  primitive  advances, 
there  remains  the  net  produce  or  the  surplus  above  the 
expenses  of  cultivation. 

Agriculture  alone  furnishes  such  a  surplus.  All  other 
occupations  are  utterly  unproductive  or  "sterile."  Industry 
and  commerce  may  be  useful  and  even  necessary  to  a  com- 
munity ;  but  they  are  economically  unproductive.  They  do 
not  create  new  wealth,  but  simply  transform  existing  wealth. 
They  may  increase  values,  but  the  increase  of  value  must  be 

125 


126  Shifting  and  Incidence  of  Taxation 

exactly  equivalent  to  the  labor  expended ;  and  the  value  of 
this  labor  is  in  last  resort  dependent  on  the  value  of  the  food 
or  the  other  objects  furnished  by  the  agricultural  class. 
Since  the  "net  product"  of  agriculture  is  therefore  the  sole 
fund  or  source  of  wealth,  all  taxes,  however  levied,  must  ulti- 
mately be  paid  from  this  fund.  Hence  it  is  much  better  to 
assess  this  fund  directly  by  a  land  tax,  than  to  assess  it  i7idi- 
rectly  by  any  other  tax.  For  in  this  way  we  save  expense 
and  trouble.  But  whether  we  levy  direct  or  so-called  indirect 
taxes,  the  incidence  is  always  on  the  land. 

Although  there  now  exists  in  English  an  admirable  sketch  ^ 
of  the  general  economic  doctrines  of  the  Physiocrats,  the 
absence  of  any  detailed  account  of  their  fiscal  views,  as  well 
as  the  lack  of  any  English  translation  of  their  chief  works,* 
justifies  a  somewhat  extended  presentation  of  their  doctrine 
of  the  incidence  of  taxation. 

The  fullest  and  the  best  account  of  the  doctrine  of  inci- 
dence is  found  in  the  works  of  Quesnay.^  This  writer  posits 
the  maxim  that  taxes  should  bear  some  proportion  to  the 
mass  of  national  income,  and  that  they  should  be  imposed 
directly  on  the  net  produce  of  land,  not  on  wages  or  com- 
modities. The  outlay  for  agriculture  should  be  regarded  as 
something  precious,  to  be  preserved  as  a  fund  not  only  for 
the  payment  of  taxes,  but  for  the  creation  of  the  social  in- 
come and  for  the  subsistence  of  the  citizens.  Otherwise, 
taxation  becomes  mere  spoliation.* 

1  Higgs,  The  Physiocrats.     London,  1897. 

2  The  only  English  translations  are  those  of  The  Oeconomical  Table,  London, 
1776,  and  of  Turgot,  Reflections  on  the  Formation  and  Distribution  of  Wealth, 
London,  1793.  A  new  translation  of  the  latter  appeared,  with  a  slightly  different 
title,  in  Professor  Ashley's  Series  of  Economic  Classics,  New  York,  1898. 

'  The  best  edition  of  Quesnay's  writings  is  CEuvres  Economiques  et  Philoso- 
phiques  de  F.  Quesnay,  Fondateur  du  Systeme  Physiocratique,  avec  une  Introduc- 
tion ct  des  Notes  par  Auguste  Oncken.  Francfort-sur-le-Main,  1888.  A  less 
complete,  but  more  familiar,  edition  is  that  of  E.  Dairp.  in  the  volume  of  the 
Collection  des  principaux  &conomistes,  entitled  Physiocrates.     Paris,  1846. 

*  "  Que  Vimpbt  ne  soit  pas  destructif,  ou  disproportionne  h  la  masse  du  revenu 
de  la  nation  ;  que  son  augmentation  suive  V augmentation  du  revenu  ;  qu^il  soit 
etabli  immediatement  sur  le  produit  net  des  biens  fonds,  et  non  sur  le  salaire  des 


The  Physiocratic    Theory  127 

Quesnay  proceeds  to  illustrate  this  doctrine  as  follows :  A 
well-regulated  tax  should  be  deemed  a  part  of  the  income 
separated  from  the  net  produce  of  the  soil ;  for  otherwise  it 
would  be  impossible  to  frame  any  rule  of  proportion  between 
taxation  and  wealth  or  income.  All  the  taxpayers  might  be 
ruined  before  the  government  would  notice  it.  The  real  net 
produce,  he  continues,  may  be  divided  into  three  parts,  be- 
longing respectively  to  the  state,  to  the  landowner,  and  to 
those  who  collect  the  tithe.  Only  the  landowner's  portion  is 
subject  to  sale,  and  its  price  will  vary  with  the  revenue  it 
yields.  The  landowner's  property  extends  only  to  this  por- 
tion. He  therefore  does  not  pay  the  others  who  share  in  the 
property,  for  their  portions  do  not  belong  to  him,  have  never 
been  acquired  by  him,  and  cannot  be  sold.  The  landowner 
then  must  not  look  upon  a  tax  as  a  charge  imposed  upon  his 
share.  He  does  not  pay  the  ordinary  tax  ;  it  is  the  part  of 
the  property  which  does  not  belong  to  him,  that  pays  the 
tax.  It  is  only  in  extraordinary  exigencies,  when  the  very 
safety  of  the  property  itself  is  imperilled,  that  all  the  co-pro- 
prietors must,  for  the  time  being,  share  in  the  burden.^ 

hommes,  ni  sur  les  denrees,  ou  il  multiplierait  les  frais  de  perception,  prejudicierait 
au  commerce  et  detruirait  annuellement  une  partie  des  richesses  de  la  nation. 
Qu'il  ne  se  prenne  pas  non  plus  sur  les  richesses  des  fermiers  des  biens-fonds; 

car  LES  AVANCES  DE  L' AGRICULTURE  D'UN  ROYAUME  DOIVENT  £tRE  ENVISAGEES 
COMME  UN  IMMEUBLE  QU'lL  FAUT  CONSERVER  PRECIEUSEMENT  POUR  LA  PRODUC- 
TION   DE  L'IMPOT,  DU  REVENU,  ET  DE  LA  SUBSISTANCE  DE  TOUTES   LES  CLASSES  DES 

CITOYENS :  autrement  I'impot  degenere  en  spoliation  et  cause  un  deperissement 
qui  ruine  promptement  un  Etat."  —  Maximes  Genirales  du  Gouvernement 
Economique  d'un  Royaume  AgricoU.  1758,  no.  v.  In  Daire's  Physiocrates, 
p.  83;    in   Oncken's   CEuvres  de   Quesnay,  p.  332. 

^  "  L'impSt  bien  ordonne  .  .  .  doit  Stre  regarde  comme  partie  du  revenu 
detachee  du  produit  net  des  bien-fonds  ...  Lc  produit  net  des  biens-fonds  se 
distribue  ^  trois  proprietaires,  \  I'Etat,  aux  possesseurs  des  terres  et  aux  deci- 
mateurs.  II  n'y  a  que  la  portion  du  possesseur  du  bien  qui  soit  alienable,  et  elle 
ne  se  vend  qu'il  raison  du  revenu  qu'elle  produit.  La  propriete  du  possesseur  ne 
s'etcnd  done  pas  au-delk.  Ce  n'est  done  pas  lui  qui  paye  les  autres  proprietaires 
qui  ont  part  aubien,  puisque  leurs  parts  ne  lui  appartiennent  pas,  qu'il  ne  les  a  pas 
acquises,  et  qu'elles  ne  sont  pas  alienables.  Le  possesseur  du  bien  ne  doit  done 
pas  regarder  I'impot  ordinaire  comme  une  charge  etablie  sur  sa  portion;  car  ce 
n'est  pas  lui  qui  paye  ce  revenu,  c'cst  la  partie  du  bien  qu'il  n'a  pas  acquise,  et 
qui  ne  lui  appartient  pas,  qui  le  paye  \  qui  il  est  dQ.    Et  ce  a'cst  que  dans  les  cas 


1 28  Shifting  and  Incidence  of  Taxation 

It  should  not  be  forgotten,  Quesnay  warns  us,  that  taxes 
ought  to  be  imposed  on  real  income  —  that  is,  on  the  annual 
net  produce  of  lands  —  and  not  on  the  wages  of  the  farm 
laborer,  or  on  the  wages  of  the  industrial  laborer,  or  on  com- 
modities. If  levied  on  agricultural  wages,  a  tax  would  im- 
pede production,  injure  the  land,  and  ruin  the  farmers,  the 
landowners  and  the  government.  If  levied  on  the  wages  of 
industrial  laborers  or  on  commodities,  a  tax  would  be  arbi- 
trary, the  cost  of  collection  would  exceed  the  yield  of  the 
tax,  and  the  burden  would  fall  without  any  uniformity  on  the 
income  of  the  sovereign  and  of  the  people.  We  must  be 
careful,  he  continues,  to  distinguish  between  a  tax  or  impost 
on  the  one  hand,  and  an  imposition  on  the  other.  Imposi- 
tions would  amount  to  triple  the  imposts,  and  would  extend 
to  the  imposts  themselves ;  for  the  impositions  or  false  taxes 
levied  on  commodities  would  have  to  be  paid  finally  by  the 
imposts  or  real  taxes.^ 

The  so-called  tax  or  imposition  on  men  who  live  by  their 
labor,  says  Quesnay,  is  really  a  tax  on  labor,  which  is  neces- 
sarily paid  by  the  employer  just  as  a  tax  on  the  horses  used 
on  a  farm  is  really  a  tax  on  the  expenses  of  cultivation. 
Therefore  a  tax  on  men,  instead  of  on  revenue,  would  rest 
on  the  expenses  of  industry  and  agriculture,  would  fall  with 

de  necessite,  dans  les  cas  ou  la  sflrete  de  la  propriete  serait  exposee,  que  tous  les 
proprietaires  doivent  pour  leur  propre  interet  contribuer  sur  leurs  portions  k  la 
subvention  passagere  que  les  besoins  pressants  de  I'Etat  peuvent  exiger."  —  Daire, 
pp.  83,  84;   Oncken,  pp.  337,  338. 

^  "  Mais  il  ne  faut  pas  oublier  que  dans  tous  les  cas  I'imposition  du  tribut  ne  doit 
porter  que  sur  le  revenu,  c'est-k-dire  sur  le  produit  net  annuel  des  biens  fonds;  et 
non  sur  les  avances  des  laboureurs,  ni  sur  les  hommes  de  travail,  ni  sur  la  vente  des* 
marchandises,  car  autrement  il  serait  destructif.  Sur  les  avances  des  labourers  ce" 
ne  serait  pas  un  impot,  mais  une  spoliation  qui  eteindrait  la  reproduction,  dete- 
riorerait  les  terres,  ruinerait  les  fermiers,  les  proprietaires  et  I'Etat.  Sur  le  salaire 
des  hommes  de  travail  et  sur  la  vente  des  marchandises,  il  serait  arbitraire,  les 
frais  de  perception  surpasseraient  I'impot,  et  retomberaient  sans  regie  sur  les 
revenus  de  la  nation  et  sur  ceux  du  souverain.  II  faut  distinguer  ici  rimposition 
d'avec  I'impot ;  I'imposition  serait  le  triple  de  I'impot,  et  s'etendrait  sur  I'impot 
mSme;  car,  dans  toutes  les  depenses  de  I'Etat,  les  taxes  imposees  sur  les  mar- 
chandises seraient  payees  par  l'imp6t.  Ainsi  cet  impot  serait  trompeur  et  ruineux." 
—  Daire,  p.  54;   Oncken,  p.  338. 


The  Physiocratic   Theory  1 29 

redoubled  force  on  the  revenue  of  land  (since  all  industry 
rests  on  the  land),  and  would  rapidly  lead  to  the  destruction 
of  real  taxation  itself.  The  same  may  be  said  of  taxes  on 
commodities. 

A  tax  levied  indiscriminately  on  land,  on  products,  on  men, 
on  labor,  on  commodities  and  on  beasts  of  burden  would 
involve  a  combination  of  six  equal  taxes,  superimposed  the 
one  on  the  other,  all  resting  on  the  same  base  and  yet  paid 
separately — but  all  together  yielding  less  revenue  than  a 
simple  real  tax,  assessed  without  expense  and  solely  on  the 
net  produce.  Such  a  tax,  suggested  by  the  order  of  nature, 
would  greatly  increase  the  revenue  of  the  sovereign,  but 
would  nevertheless  cost  the  nation  and  the  state  five-sixths 
less  than  the  taxes  imposed  on  everything.  The  latter, 
moreover,  would  annihilate  the  country's  production  and 
would  exclude  all  possibility  of  ultimate  reform.  For  these 
taxes,  illusory  for  the  sovereign  and  ruinous  to  the  nation, 
appear  to  the  vulgar  all  the  more  inevitable  as  the  decay  of 
agriculture  progresses. 

Quesnay  concludes,  therefore,  that  taxes  should  be  imposed 
directly  on  the  net  produce  of  land ;  for,  no  matter  how  the 
tax  is  imposed,  it  is  always  paid  by  the  land.  Hence  the 
form  of  taxation  which  is  at  once  the  simplest,  the  best  regu- 
lated, the  most  productive  and  the  least  burdensome,  is  that 
which  is  levied  proportionally  to  net  produce  and  directly  on 
the  source  of  the  ever  new-born  wealth.^ 

In  another  work,^  Quesnay  devotes  himself  specifically 
to  the  problem  of  indirect  taxation.  Some  indirect  taxes, 
he  tells  us,  are  comparatively  simple  and  economical.     Such, 

^  "  L'impot  doit  done  etre  pris  immediatement  sur  le  produit  net  des  biens- 
fonds;  car,  de  quelque  maniere  qu'il  soit  impose  dans  un  royaume  qui  tire  ses 
richesses  de  son  territoire,  il  est  toujours  paye  par  les  biens-fonds.  Ainsi  la  forme 
d'imposition  la  plus  simple,  la  plus  reglee,  la  plus  profitable  a  I'Etat,  et  la  moins 
onereuse  aux  contribuables,  est  celle  qui  est  etablie  proportionnellement  au  produit 
net  et  immediatement  i  la  source  des  richesses  continuellemcnt  renaissantes."  — 
Daire,  pp.  84,  85;   Oncken,  p.  339. 

2  Second  Probleme  Economiqiie :  determiner  les  Effets  d'un  Tmpot  Indirect 
In  Physioc rates,  Daire's  edition,  pp.  127  et  seq. ;  in  (Euvres,  Oncken 's  edition, 
pp.  697  et  seq. 


1 30  Shifting  and  Incidence  of  Taxation 

for  instance,  are  the  general  property  or  income  tax,  known 
as  the  taille  personnelle,  the  poll  tax,  the  corvee  or  road  tax, 
the  tax  on  house  rent,  and  the  tax  on  funds.  Others  are 
more  complex  and  more  costly  to  collect.  Such  are  the 
taxes  on  products  and  merchandises,  import  and  export 
duties,  internal  tolls,  taxes  on  transportation  and  communi- 
cation, on  sales,  on  offices  and  positions,  on  privileges  and 
franchises.  All  these  taxes  together  form  an  aggregate  that 
may  be  summed  up  under  the  name  of  the  indirect  tax ;  the 
various  expenses  of  collection  and  other  surcharges,  consti- 
tute another  mass  which  may  be  called  the  cost  of  the  indi- 
rect tax} 

Quesnay  proceeds  to  call  attention  to  the  evil  results  of 
all  these  indirect  taxes.  Following  the  detailed  figures  of 
his  celebrated  Economic  Tabled  he  calculates  the  actual 
losses  to  the  community.  If,  for  instance,  instead  of  a 
direct  tax  of  800  millions,  only  300  millions  were  raised  by 
a  land  tax,  and  500  millions  by  indirect  taxes,  Quesnay 
figures  out  that  the  landowners  would  have  to  pay  235  mil- 
lions more,  that  the  government  would  lose  379  millions,  and 
that  wages  would  fall  by  a  sum   of  318  millions,  making  a 

1  "  II  y  a  des  imp8ts  indirects,  simples  et  peu  dispendieux  dans  leur  perception. 
Tels  sont  ceux  qui  s'etabliraient  sur  les  hommes  en  forme  de  taille  personelle,  de 
capitation,  de  corvees,  de  taxes  sur  les  loyers  de  maisons,  sur  les  rentes  pecuniaires, 
etc.  D'autres  sont  fort  composes,  et  entrainent  une  perception  fort  dispendieuse. 
Tels  sont  ceux  qui  seraient  etablis  sur  les  denrees  et  marchandises,  aux  entrees,  aux 
sorties,  aux  peages,  aux  douanes,  ou  sur  les  navigations  et  charrois  du  commerce 
interieur  et  exterieur,  ou  sur  la  circulation  de  I'argent  dans  les  achats  et  dans  les 
ventes  de  toute  espece;  telles  sont  aussi  les  creations  de  charges  et  d'offices,  avec 
attribution  perpetuelle  ou  ^  terme  de  droits  et  taxes,  au  profit  de  ceux  qui  en 
seraient  revetus,  les  privileges  de  commerce  exclusif,  etc.  .  .  .  Mais  la  reunion  de 
ces  divers  impots  indirects,  plus  au  moins  onereux,  formant  une  masse  totale  que 
I'on  peut  en  general  appeler  Vimpbt  indirect,  la  reunion  des  frais  de  perception  et 
des  autres  surcharges  que  tous  ces  divers  impots  entrainent  k  leur  suite,  presente 
une  autre  masse  que  I'on  peut  appeler  aussi  en  general  les  frais  de  ritnpot  indi- 
rect, et  dont  la  quotite,  consideree  relativement  ^  la  somme  que  le  souverain  retire 
de  la  totalite  des  impots  indirects,  etablit  le  taux  moyen  des  frais  de  perception 
des  impots  de  ce  genre."  —  Daire,  p.  127;  Oncken,  pp.  697,  698. 

^  Le  Tableau  Economique.  This  was  reprinted  by  the  British  Economic  Asso- 
ciation in  1894. 


The  Physiocratic    Theory  131 

total  loss  to  the  community  of  932  millions.  In  addition  to 
this  immense  money  loss,  the  other  resulting  evils  may  be 
summed  up  under  four  heads.  First  in  order  comes  the 
rapid  deterioration  of  the  land,  due  partly  to  the  decrease 
in  agricultural  capital,  partly  to  the  fear  of  employing  new 
machines  or  adopting  new  processes  which  would  be  subject 
to  indirect  taxes,  partly  to  the  ravages  made  in  the  substance 
of  the  cultivators  themselves.  Secondly,  we  notice  the  im- 
mense fortunes  of  the  tax-collectors,  which  impede  the  cir- 
culation of  money  and  its  return  to  agriculture.  Thirdly,  is 
to  be  mentioned  the  residence  of  the  rich  financiers  in  the 
capital,  which  tends  to  separate  consumption  from  the  place 
of  production.  And,  fourthly,  we  must  not  forget  the  mul- 
tiplication of  beggars,  which  is  to  be  directly  ascribed  to 
indirect  taxation  ;  for  indirect  taxes,  by  annihilating  a  part 
of  the  annual  reproduction  of  wealth,  destroy  wages  and  the 
means  of  subsistence.  The  increase  of  beggary,  again,  in 
last  resort  means  an  additional  burden  on  the  landowners ; 
for  they  dare  not  refuse  alms.^ 

Quesnay  is  severe  on  the  landowners  for  not  recognizing 
the  wisdom  of  the  single  tax.  The  tax  seems  to  them  exces- 
sive. Their  ignorant  cupidity  has  never  allowed  them  to  see 
that  taxes  can  really  be  imposed  only  on  the  revenue  of  the 
land.  They  have  always  thought  that  taxes  ought  to  be 
levied  on  men  or  on  the  things  consumed  by  men,  because 
all  men  share  in  the  benefits  of  the  protection  of  government. 
They  have  never  reflected  that  man,  whose  physical  consti- 
tution depends  on  the  satisfaction  of  his  wants,  can  do  noth- 
ing by  himself ;  and  that  all  taxes  imposed  on  men,  or  on  the 
things  they  consume,  are  necessarily  taken  from  the  wealth 
on  which  men  live  and  which  the  land  alone  produces.^ 

^  Daire,  pp.  139,  140;   Oncken,  pp.  716,  717. 

*  "  Mais  ce  revenu  public  de  800  millions,  qui  embrasse  dircctcnicnt  les  deux 
septiemes  du  produit  net  du  territoire,  aurait  paru  cxcessif  aux  propri^taires  fon- 
ciers.  Leur  cupidit6  ignorante  ne  leur  a  jamais  laisse  apcrccvoir  que  I'impot  nc 
doit  etre  pris  ([ue  sur  le  revenu  des  terrcs.  lis  ont  toujours  pcnsc  que  I'impot 
devait  ctre  ctabli  sur  Ics  hommes  ou  sur  Ics  consommations  que  font  Ics  hommes, 
parce  que  les  hommes  participent  tous  h  la  protection  dc  la  puissance  souvcraine. 


132  Shifting  and  Incidence  of  Taxation 

As  a  result  of  his  whole  discussion,  Quesnay  concludes 
that  no  matter  how  it  is  arranged,  the  productive  class,  the 
landowners  and  the  tax  itself — as  the  first  distributors  of 
the  total  expenses  —  inevitably  pay  the  whole  of  the  indirect 
taxes  levied  on  the  men  they  employ,  or  on  the  goods  and 
commodities  they  consume;  and  each  one  contributes  to  the 
tax  in  proportion  to  his  share  of  the  expenses.^ 

Quesnay's  theories  were  soon  adopted  by  a  number  of  en- 
thusiastic followers.  The  Marquis  of  Mirabeau  devoted  a 
special  book  to  the  subject  of  taxation,  laying  down  the  gen- 
eral principle  that  "  taxes  should  be  levied  directly  on  the 
annual  reproduction,"  or  "on  the  source  of  all  revenue."^ 
In  another  place  he  points  out  that  no  matter  how  the  tax  is 
imposed,  it  must  be  paid  from  the  net  product;  and  unless 
it  is  assessed  directly  on  this  product  we  are  without  base  or 
compass.^  A  few  years  later  another  writer.  Saint  Peravy, 
devoted  a  separate  work  to  the  study  of  indirect  taxes,  from 
the  same  point  of  view.* 

Mercier  de  la  Riviere,  perhaps  the  clearest  thinker  of  the 
Physiocrats,  took  especial  pains  in  making  this  distinction 

lis  n'ont  nullement  songe  que  I'homme,  dont  la  constitution  physique  ne  presente 
que  des  besoins,  ne  peut  rien  par  lui-mSme;  et  que  toute  imposition  mise  sur  les 
hommes,  ou  sur  leur  consommation,  serait  necessairement  prise  sur  les  richesses 
qui  font  subsister  les  hommes,  et  que  la  terre  seule  produit."  —  Daire,  p.  131; 
Oncken,  p.  704. 

1  "Ainsi,  de  quelque  fa^on  qu'on  s'arrange,  la  classe  productive,  les  pro- 
prietaires  des  terres,  et  I'impSt  meme,  comme  premiers  distributeurs  des  depenses 
payent  inevitablement  la  totalite  de  I'imposition  indirecte  que  I'on  etablit  sur  les 
hommes  qu'ils  salarient,  ou  sur  les  denrees  et  marchandises  qu'ils  consomment; 
et  ils  y  contribuent  chacun  \  raison  de  la  distribution  de  ses  depenses."  —  Daire, 
p.  134;   Oncken,  p.  707. 

2  "  L'Imp8t  doit  etre  etabli  immediatement  sur  la  reproduction  annuelle."  — 
Theorie  de  Vlinpbt.  [Par  Le  Marquis  de  Mirabeau.]  1760,  p.  123.  "Que 
I'impot  soit  etabli  immediatement  ^  la  source  des  revenus." — Ibid.,'^.  131.  In 
the  more  common  octavo  edition  of  1761  these  passages  are  found  on  pp.  150 
and  160. 

^  "  De  quelque  maniere  que  se  retourne  I'impot  il  est  impossible  qu'il  provienne 
d'autre  part  que  du  produit;  s'il  n'est  pris  directement  sur  le  produit  net  qui 
constitue  le  revenu,  il  n'a  plus  ni  base,  ni  boussole."  —  VAmi  des  Hommes,  ou 
Traite  de  la  Population,  1757,  tome  vii,  p.  45.      Cf,  pp,  47,  171. 

*  Memoire  sur  les  Effets  de  riinpAt  Indirect.     Par  Saint  Peravy.      1768. 


The  Physiocratic   Theory  133 

between  direct  and  indirect  taxes  hinge  on  the  question  of 
incidence.  The  essential  form  of  taxation,  he  tells  us,  con- 
sists in  taking  the  tax  directly  where  it  is,  and  in  not  trying 
to  take  it  where  it  is  not.  It  is  clear  that  the  funds  destined 
to  the  payment  of  taxes  are  to  be  found  only  in  the  hands 
of  the  landowners,  or  rather  of  the  farmers.  They  receive 
these  funds  from  the  land,  and  when  they  give  them  up  to 
the  king,  they  are  not  really  giving  anything  that  belongs  to 
them.  On  them,  therefore,  we  must  lay  the  tax,  if  we  wish 
to  burden  nobody.  To  change  this  direct  form  of  taxation, 
and  to  give  it  an  indirect  form,  is  to  reverse  the  natural  order, 
from  which  we  cannot  deviate  without  the  greatest  evils. 
Taxation  is  indirect,  when  it  is  levied  on  persons  or  on  com- 
modities. In  both  cases  the  damage  to  the  king  and  to  the 
people  alike  is  enormous  and  inevitable.^ 

The  evils  above  referred  to,  he  tells  us  in  another  passage, 
are  inherent  in  the  very  nature  of  indirect  taxes.  The  name 
itself  tells  us  that  the  tax  is  not  borne  by  those  on  whom  it 
seems  to  be  directly  laid  ;  and  that  is  perfectly  true.  Even 
when  it  appears  to  have  nothing  to  do  with  the  landowners, 
it  falls  on  them  —  and  with  considerable  additions ;  for  it 
always  costs  them  more  than  the  king  receives.  In  certain 
cases  it  even  causes  them  to  suffer  losses  which  redound  to 

^  "  Ainsi  la  forme  essentielle  de  I'impot  consiste  k  prendre  directement  Timpot 
ou  il  est,  et  a  ne  pas  vouloir  le  prendre  ou  il  n'est  pas.  ...  II  est  evident  que  les 
fonds  qui  appartiennent  k  Timpot  ne  peuvent  se  trouver  que  dans  les  mains  des 
proprietaires  fonciers,  ou  plutot  des  cultivateurs  ou  fermiers  qui,  i  cet  egard,  les 
representent;  ceux-ci  re^oivent  ces  fonds  de  la  terre  meme  et,  lorsqu'ils  les  rendent 
au  souverain,  ils  ne  donnent  rien  de  ce  qui  Icur  appartient;  c'est  done  i  eux  qu'il 
faut  demander  I'impot,  pour  qu'il  ne  suit  \  la  charge  de  personne.  Changer  cette 
forme  directe  de  I'etablissement  de  I'impSt  pour  lui  donner  une  forme  indirecU, 
c'est  renverser  un  ordre  naturel  dont  on  ne  peut  s'ecarter  sans  les  plus  grands 
inconvenients. 

"  La  forme  de  I'impot  est  indirecte  lorsqu'il  est  6tabli  ou  sur  les  pcrsonnes 
m8mes  ou  sur  les  choses  commergahles :  dans  I'un  ct  I'autre  cas,  les  prejudices 
qu'il  cause  au  souverain  et  \  la  nation  sont  enormes  et  inevitables,  et  ils  sont 
k-peu-pres  les  memes,  quoiqu'ils  ayent  une  marche  et  une  gradation  difler- 
entes."  —  V Ordre  Naturel  el  Essentiel  des  Societh  Politiques.  [Par  Mercier 
de  la  RiviJre.]  Londres,  1767,  chap,  xxx,  p.  243.  In  Dairc,  Phyiiocrates,  it  is 
reprinted  as  chapter  iv,  p.  474. 


134  Shifting  and  Incidence  of  Taxation 

no  one's  advantage,  and  it  thus  brings  about  a  progressive 
decrease  in  the  total  quantity  of  wealth. ^ 

Therefore,  he  concludes,  in  the  essential  order  of  society 
(to  outline  which  his  whole  book  is  written)  taxation  is  en- 
tirely independent.  The  revenue  it  yields  is  the  necessary 
result  of  a  combination  of  causes  which  always  remain  the 
same  and  always  produce  the  same  effects.  But  this  valu- 
able advantage  can  be  retained  only  so  far  as  its  essential 
form  is  not  changed,  and  as  the  king  directly  seizes  the 
portion  that  his  co-ownership  in  the  lands  of  his  dominion 
gives  him  a  right  to  take.^ 

The  great  popularizer  of  the  Physiocratic  doctrines,  Du 
Pont  de  Nemours,  who  subsequently  tried  to  impress  his  ideas 
of  incidence  on  the  French  revolutionary  parliament,  put 
the  theory  in  a  little  different  way.^  Taxes,  he  tells  us,  can- 
not be  imposed  indifferently  on  all  kinds  of  wealth.  Nature 
has  not  given  to  that  form  of  wealth  which  is  used  in  agri- 
cultural production  the  power  of  making  any  contribution 
to  taxes.  She  has,  in  fact,  imperiously  subjected  it  to  the 
law  of  being  wholly  consumed  in  keeping  up  the  cultivation 
of  the  land  itself,  on  pain  of  seeing  cultivation,  the  crops,  the 
people,  the  empire  itself  gradually  disappear.     That  portion 

1  "  Les  inconvenients  dont  je  veux  parler  sont  dans  la  nature  mSme  de  I'impot 
indirect.  Le  nom  qu'on  lui  donne  ici  annonce  qu'il  n'est  point  supporte  par 
ceux  sur  lesquels  il  semble  etre  directement  etabli,  et  cela  est  vrai :  lors  meme  qu'il 
parott  totalement  etranger  aux  proprietaires  fonciers,  il  retombe  sur  eux,  et  ^ 
grands  frais,  car  il  leur  cofite  toujours  beaucoup  plus  qu'il  ne  rend  au  Souverain;  il 
leur  occasionne  mSme,  en  certains  cas,  des  pertes  seches  dont  personne  ne  profite,  des 
diminutions  progressives  de  la  masse  commune  des  richesses  disponibles,  dans  les- 
quelles  le  Souverain  doit  partager,  et  qui  sont  la  mesure  de  sa  puissance  politique."  — 
VOrdre  Naturel  et  Essentiel  des  Societes  Politiques,  p.  247.    In  Daire's  ed.,  p.  476. 

2  "Ainsi,  dans  I'ordre  essentiel  des  societes,  I'impot  est  totalement  independant; 
le  produit  qu'il  donne  annuellement  est  le  fruit  necessaire  d'un  enchalnement  de 
diverses  causes  qui  seront  toujours  les  memes,  et  qui  produiront  toujours  les  mSmes 
effets.  Mais  il  ne  pent  conserver  cet  avantage  precieux  qu'autant  qu'on  ne  change 
point  sa  forme  essentielle,  que  le  souverain  prend  directement  la  part  proportion- 
nelle  que  sa  copropriete  lui  donne  droit  de  prendre  dans  les  produits  nets  des 
terres  de  sa  domination." —  Ibid.,  p.  249.     In  Daire's  ed.,  p.  478. 

8  In  his  De  VOrigine  et  des  Progres  d^une  Science  Nouvelle.  [Par  P.  S.  Du 
Pont  du  Nemours.]     Londres,  1768.    In  Daire's  Physiocrates,  p.  335. 


The  Physiocratic   Theory  135 

of  the  crops  which  is  called  the  net  produce  is,  then,  the  only 
part  naturally  subject  to  taxation.^ 

The  aim  of  taxation,  Du  Pont  tells  us  in  another  place,  is 
the  preservation  of  the  rights  of  property  and  of  liberty  in 
their  original  and  natural  extent.  All  kinds  of  taxes  which 
curtail  liberty  and  property,  and  which  therefore  necessarily 
diminish  wealth  and  population,  would  thus  be  clearly  con- 
trary to  the  aim  of  taxation.  If  duties  were  levied  on  persons, 
on  commodities,  on  expense,  or  on  consumption,  their  collec- 
tion would  be  costly,  their  existence  would  impede  the  liberty 
of  human  effort,  and  they  would  necessarily  increase  the  ex- 
penses of  commerce  and  agriculture.^ 

Coming,  then,  more  specifically  to  the  problem  of  shifting, 
Du  Pont  contends  that  when  an  indirect  route  is  taken  in  the 
assessment  of  a  tax,  it  is  none  the  less  paid,  in  last  analysis, 
by  the  net  produce  of  land.  But  it  is  then  extremely  disas- 
trous and  much  more  burdensome  to  the  landowners.  It  cur- 
tails liberty  and  restrains  property ;  it  lowers  the  price  of 
produce  in  the  hands  of  the  producer ;  it  decreases  the  mass 
of  products,  and  still  more  the  sum  of  national  revenues ;  it 
leads  to  misery  and  depopulation  ;    it  ruins  by  degrees  the 

^  "  L'impot  ne  saurait  meme  porter  indifferemment  sur  toutes  les  richesses 
renaissantes.  La  nature  a  refuse  i  celles  qu'on  appelle  reprises  des  cuUivateurs 
la  faculte  de  contribuer  \  l'impot,  puisqu'elle  leur  a  imperieusement  impose  la  loi 
d'etre  employees  en  entier  \  entretenir  et  jl  perpetuer  la  culture,  sous  peine  de 
voir  an^antir  par  degres  la  culture,  les  recoltes,  la  population,  les  empires. 

"  La  portion  des  recoltes  nommee  le  proJuit  net,  est  done  la  seule  contribuable 
^  l'impot,  la  seule  que  la  nature  ait  rendue  propre  \  y  subvenir. 

"II  est  done  de  Vessence  de  l'impot  d'etre  une  portion  du  produit  net  de  la 
culture."  —  Ibid.,  p.  351. 

2  "  Le  but  de  l'impot  est  la  conservation  du  droit  de  propri^te  et  de  la  liberie 
de  I'homme  dans  toute  leur  etendue  naturelle  et  primitive  ;  conservation  qui  peut 
seule  assurer  la  multiplication  des  richesses  et  de  la  population. 

"Toute  forme  d'imposition  qui  restreindrait  la  propriete  et  la  liberte  de  I'liomme, 
et  qui  diminuerait  necessairement  les  richesses  et  la  population,  serait  done  mani- 
festement  opposee  au  but  dc  l'impot. 

"  Si  Ton  6tablissait  des  impositions  sur  les  personnes,  sur  les  marchandises,  sur 
les  depenses,  sur  les  consommations,  la  perception  de  ces  impositions  serait  fort 
coOteuse  ;  leur  existence  gSnerait  la  liberte  des  travaux  humains,  et  augmenterait 
necessairement  les  frais  de  commerce  et  dc  culture."  —  Ibid.,  pp.  351,  352. 


136  Shifting  and  Incidence  of  Taxation 

soil,  the  farmers,  the  landowners,  the  nation  and  the  king.^ 
It  is  no  wonder  that,  holding  such  views,  the  Physiocrats 
summed  up  their  theory  of  taxation  in  the  famous  phrase : 
Indirect  taxes,  poor  peasants ;  poor  peasants,  poor  kingdom  ; 
poor  kingdom,  poor  king.^ 

The  Abbe  Baudeau  develops  the  same  line  of  thought. 
Instead  of  the  net  produce,  he  speaks  of  "  the  clear  and  liquid 
annual  revenue  of  land,"  which  he  thinks  is  so  simple  an  idea 
that  it  is  self-evident.^  Baudeau  emphasizes  the  fact  already 
alluded  to  by  Quesnay,  and  subsequently  worked  out  more 
lucidly  by  Turgot  —  namely,  that  a  part  of  this  "clear  reve- 
nue" must  really  be  regarded  as  belonging  not  to  the  owner 
but  to  the  king ;  and  that  therefore,  when  a  man  buys  a  piece 
of  land,  he  buys  not  the  whole  of  its  revenue,  but  only  that 
part  which  is  not  due  to  government.  The  payment  due  to 
the  king  by  virtue  of  his  right  of  sovereignty  is,  therefore, 
not  really  a  tax  at  all ;  it  is  not,  as  many  people  say  of  taxa- 
tion in  general,  a  sacrifice  which  each  citizen  makes  of  a  part 
of  his  property  in  order  to  keep  the  rest.^ 

1  "  Nous  venons  de  voir  que  lorsqu'on  veut  prendre  une  route  indirecte  pour 
lever  I'impot,  il  n'en  est  pas  moins  paye,  en  derniere  analyse,  par  le  produit  net 
des  biens-fonds;  mais  qu'il  Test  alors  d'une  maniere  extremement  desastreuse  et 
beaucoup  plus  onereuse  pour  les  proprietaires  fonciers;  qu'il  gene  la  liberie  et 
restreint  la  propriete  des  citoyens;  qu'il  fait  baisser  le  prix  des  productions,  Ji  la 
vente  de  la  premiere  main;  qu'il  diminue  la  masse  des  produits,  et  encore  plus  la 
somme  des  revenus  du  terriloire;  qu'il  amene  la  misere  et  la  depopulation;  qu'il 
ruine  par  degres  la  culture,  les  cultivateurs,  les  proprietaires  fonciers,  la  nation  et 
le  souverain."  —  De  VOrigine  et  des  Progres  d'une  Science  A'ouvelle,  p.  354. 

2  "  Impositions  indirectes;  pauvres  paysans.  Pauvres  paysans;  pauvre  roy- 
aume.     Pauvre  royaume;  pauvre  roi."  —  /(5?V.,  p.  354. 

3  "  Vouloir  connaitre  le  revenu  clair  et  liquide  annuel  de  chaque  terre  par  esti- 
mation commune  de  son  etat  habituel,  c'est  done  chercher  une  chose  toute  trou- 
vee."  —  Premiere  Introduction  h  la  Philosophic  P.conomique,  ou  Analyse  des  Atats 
Polices.  [Par  Nicolas  Baudeau.]  1771.  In  Daire's /%)'JiWra/«,  p.  767.  Similar 
ideas  may  be  found  in  Baudeau's  earlier  vt'ork,  Lettres  d'un  Citoyen  h  un  Magis- 
tral sur  les  Vingtiemes  et  les  autres  Impdts.     1768. 

*  "  Tout  proprietaire  saurait  qu'il  n'acquiert  pour  ses  heritiers,  pour  ses  ces- 
sionnaires  ou  ayant-cause,  que  quatorze  vingtiemes,  ou  un  peu  plus  de  deux  tiers, 
du  produit  net  annuel  d'un  fonds  mis  en  exploitation;  que  le  reste  n'est  pas  ^  lui, 
mais  ^  la  souverainete. 

"  II  sail  que  le  droit  de  la  souverainete,  sur  un  peu  moins  du  tiers  des  rerenos 


The  Physiocratic   Theory  137 

The  specific  question  of  the  incidence  of  export  and  im- 
port duties,  as  well  as  of  taxes  on  communication  and  trans- 
portation in  general,  was  treated  at  considerable  length  by 
another  of  the  Physiocrats,  Le  Trosne.  Most  of  what  he 
says  deserves  careful  attention  even  to-day,  especially  when 
he  discusses  the  conditions  under  which  a  part  of  the  export 
or  import  duties  is  supposed  to  rest  finally  on  the  foreign 
country.^  But  these  are  points  of  detail,  the  consideration  of 
which  would  lead  us  too  far  astray  in  this  place. 

The  most  cautious  as  well  as  the  greatest  of  the  Physio- 
crats was  Turgot.  In  discussing  the  question  of  the  real 
incidence  of  the  land  tax,  Turgot  expounds  very  clearly  what 
came  to  be  known  subsequently  as  the  capitalization  theory. 
If  land  alone  were  subject  to  taxation,  says  he,  once  the  tax 
was  settled,  the  capitalist  purchaser  would  not  count  in  the 
interest  of  his  money  the  part  devoted  to  the  payment  of  the 
tax  —  just  as  a  man  who  to-day  buys  a  piece  of  land  does  not 
buy  the  tithe  which  the  priest  receives  or  the  land  tax,  but 
buys  only  the  income  which  remains  after  deducting  the 
tithe  and  the  tax.^ 

territoriaux  clairs  et  liquides,  est  fonde,  comme  tout  droit  juste  et  raisonnable,  sur 
des  avances  faites,  sur  des  travaux  accomplis  ci-devant,  et  encore  sur  les  memes 
avances,  les  memes  travaux  ^  continuer;  sur  leur  efficacite,  productive  de  ces 
mSmes  revenus,  dont  ils  sont  une  cause  efficiente,  une  des  conditions  indispensa- 
bles  sans  lesquelles  il  n'existerait  point  un  tel  produit  net. 

"  Cette  perception,  ainsi  reglee,  n'a  done  point  les  caracteres  de  ce  qu'on  appelle 
impot;  ce  n'est  point,  comme  on  le  dit  avec  quelque  apparence  de  raison  dans  les 
Etats  mal  administres,  un  sacrifice  que  chacun  fait,  d'une  portion  de  sa  propriete, 
pour  conserver  le  reste."  —  Daire's  Physiocrates,  pp.  762,  763. 

^  De  V  Inter  et  Social,  par  rapport  i  la  Valeur,  i  la  Circulation,  h  l' Industrie 
et  au  Commerce  Interieur  et  Exterieur.  Par  Guillaume-Fran9ois  Le  Trosne. 
1777.     In  Daire's  Physiocrates,  esp.  pp.  988-ICXD7. 

^  "  Je  reponds,  en  second  lieu  que,  si  les  terres  etaient  chargees  seules  de  la 
contribution  aux  depenses  publiques,  des  qu'une  fois  cette  contribution  serait 
reglee,  le  capitalistc  qui  les  acheterait  ne  compterait  pas  dans  I'interSt  de  son 
argent  la  partie  du  revenu  affectee  \  cette  contribution  ;  de  mSme  qu'on  homme 
qui  achete  aujourd'hui  une  terre  n'achete  pas  la  dtme  que  re^oit  le  cure,  ni  mSme 
Timpflt  connu,  mais  le  revenu  qui  reste,  deduction  faitc  de  cette  dtmc  et  cet 
impot."  —  Reflexions  sur  la  Formation  et  la  Distribution  des  Richesses,  §97.  Cf. 
his  Comparaison  de  r Impbt  direct  et  de  f  Impot  indirect,  in  CEuvres  de  Turgot, 
edited  by  Daire.     Paris,  1844,  '»  P-  A^i- 


138  Shifting  and  Incidence  of  Taxation 

In  an  early  memoir,  written  in  1764,  Turgot  maintains  that 
all  taxes  must  be  paid  out  of  income.  He  then  proceeds  to  a 
discussion  of  income  in  general,  in  the  course  of  which  he 
elaborates  the  doctrine  of  the  prodidt  net  which  alone  con- 
stitutes the  real  social  revenue,  disposable  for  purposes  of 
taxation.  The  landowner,  says  he,  is  the  only  one  who  has 
a  real  income :  ^  every  other  conception  of  income  is  illu- 
sory.^  It  follows,  therefore,  that  all  taxes,  howsoever  levied, 
are  ultimately  paid  from  this  income. 

This  leads  Turgot  to  distinguish  between  direct  and  indi- 
rect taxes.  In  a  later  memoir,  he  gives  a  formal  definition 
of  these  terms.  The  tax  which  the  landowner  pays  immedi- 
ately out  of  his  income,  he  tells  us,  is  called  a  direct  tax ;  the 
tax  which  is  not  directly  assessed  on  the  income  is  called  an 
indirect  tax.  Indirect  taxes  may  be  reduced  to  three  chief 
classes :  the  tax  on  the  tenant  farmer,  the  tax  on  the  profits 
of  capital  or  industry,  and  the  tax  on  commodities  sold  or 
consumed.  The  landowner,  however,  bears  the  burden  of 
the  indirect  tax  in  two  ways :  through  an  increase  of  his 
expenses,  and  through  a  decrease  of  his  income.^     The  term 

1  "Le  proprietaire  de  fonds  est  le  seul  qui  ait  un  veritable  revenu."  —  Plan 
d^un  Mhnoire  sur  les  Impositions  en  General,  etc.,  in  CEuvres  de  Turgot,  i, 
p.  400. 

2  "  Tout  autre  idee  de  revenu  est  illusoire.  Lorsqu'on  achete  un  bien-fonds, 
c'est  ce  revenu  seul  qu'on  achete."  —  Ibid.,  p.  402. 

3  "  L'impot  que  le  proprietaire  paye  immediatement  sur  son  revenu  est  appele 
impdt  direct.  L'impot  qui  n'est  point  assis  directement  sur  le  revenu  du  proprie- 
taire, mais  qui  porte  ou  sur  les  frais  productifs  du  revenu,  ou  sur  les  depenses  de 
ce  revenu,  est  appele  impbt  indirect. 

"  L'impot  indirect,  malgre  la  variete  des  formes  dont  il  est  susceptible,  peut  se 
reduire  k  trois  classes : 

"  L'impot  sur  les  cultivateurs;  — l'impot  sur  les  profits  de  I'argent  ou  de  I'indus- 
trie;  — l'impot  sur  les  marchandises  passantes,  vendues  ou  consommees. 

"  Ces  trois  classes,  et  les  differentes  formes  d'impositions  dans  lesquelles  elles  se 
subdivisent,  peuvent  retomber  sur  les  proprietaires  par  un  circuit  plus  ou  moins 
long,  et  d'une  maniere  plus  ou  moins  onereuse. 

"  Les  proprietaires  payent  l'impot  indirect  de  deux  fa^ons,  en  augmentation  de 
depense  et  en  diminution  de  revenu."  —  Explications  sur  le  Sujet  du  Prix  offert 
par  la  Socike  Royale  de  V Agriculture  de  Limoges  au  Memoire  dans  lequel  on 
aurait  le  viieux  demontre  V Effet  de  P Impbt  Indirect  sur  le  Revenu  des  Proprie- 
taires de  Bien-Eonds  ;  in  CEuvres  de  Turgot,  i,  pp.  416,  417. 


The  Physiocratic   Theory  139 

"indirect  tax,"  therefore,  covers  every  tax  except  a  direct 
tax  on  the  net  revenue  of  land.^ 

In  another  place,  Turgot  tries  to  meet  the  objection  of 
those  who  maintained  that  wealth  in  general  is  the  source  of 
taxation.  It  is  not  all  real  wealth,  he  tells  us,  that  can  pay- 
taxes.  To  serve  this  purpose,  wealth  must  be  disposable,  — 
that  is,  it  must  not  be  needed  for  the  reproduction  of  the 
following  year,  directly  or  indirectly.  All  wealth  may  indeed 
be  taken  by  main  force  ;  but  no  wealth  necessary  to  the  work 
of  reproduction  can  be  diverted  from  this  end  without  injury 
to  the  national  wealth,  and  consequently  to  the  power  of  the 
government.  In  the  recognition  of  this  principle  consists  the 
whole  theory  of  taxation.^ 

Finally,  in  a  memoir  said  to  have  been  written  for  Ben- 
jamin Franklin,  Turgot  develops  more  fully  his  theories  of 
the  shifting  of  all  indirect  taxes  to  the  landowner.^  Yet,  not- 
withstanding his  theories,  Turgot,  while  at  the  head  of  the 
treasury,  made  no  attempt,  as  is  sometimes  asserted,  to  put 
the  plan  of  the  single  tax  into  actual  operation.  He  was  too 
great  a  statesman  to  commit  himself  to  any  such  hazardous 
scheme. 

The  Physiocrats,  it  may  be  remarked  in  passing,  exercised  a 
perceptible  influence  on  contemporary  American  thought.    In 

1  Elsewhere,  however,  Turgot  also  classes  a  poll  tax  as  a  direct  tax.  But  if  the 
poll  tax  be  graded  so  as  to  reach  the  "  faculties,  industry,  profits  or  wages,"  it 
must  be  called  an  indirect  tax.  —  Ibid,,  i,  p.  396. 

^  "  Ce  n'est  pas  toute  richesse  reelle,  comme  le  croit  I'auteur,  qui  peut  payer 
I'impot;  il  faut  encore  qu'elle  soit  disponibU,  c'est-k-dire  qu'elle  ne  soit  pas 
necessaire  k  la  reproduction  de  I'annee  suivante,  soit  immediatement,  soit  mediate- 
ment.  Toute  richesse  necessaire  aux  travaux  de  la  reproduction  n'en  peut  etre 
detournee  sans  nuire  k  cette  reproduction,  \  la  richesse  nationale,  et  par  suite  aux 
moyens  de  puissance  du  gouvernement.  Voilk  toute  la  theorie  de  I'impSt."  In 
Observations  sur  U  Memoire  de  M.  Graslin  en  faveur  de  V Impbt  Indirect.  — 
(Euvres,  i,  pp.  434,  435. 

'  Comparaison  de  PImpot  sur  le  Revenu  des  Proprietaires  et  f  Tmpbt  sur  Us 
Consommations.  —  (Euvres,  ii,  p.  409.  Du  Pont  de  Nemours  says  that  this  was 
written  to  dissuade  Hamilton,  then  Secretary  of  the  Treasury,  from  adopting  his 
scheme  of  indirect  taxes.  But  as  Turgot  had  been  dead  several  years  before 
Hamilton  formulated  his  scheme,  this  is  clearly  impossible.  Yet  the  statement 
that  the  memoir  was  originally  written  for  Franklin  may  be  true. 


140  Shifting  and  Incidence  of  Taxation 

a  number  of  the  writings  of  the  foremost  American  statesmen 
there  are  continual  references  to  the  doctrines  of  the  "  Econ- 
omists." Benjamin  Franklin,  for  instance,  carried  on  an 
extended  correspondence  with  the  Abb6  Morellet  and  with 
Le  Veillard.  In  one  of  his  later  letters,  he  refers  to  the  doc- 
trine as  among  the  principles  of  economics  which  he  origi- 
nally shared ;  but  his  great  practical  sense  convinced  him  of 
the  futility  of  the  attempt  to  apply  the  scheme  in  America.^ 
Alexander  Hamilton  also  seems,  in  one  of  the  essays  in  the 
Contincntalist,  to  have  shared  the  opinions  of  the  Physio- 
crats.2  A  careful  reading  of  the  context,  however,  shows  that 
Hamilton  did  not  advocate  any  scheme  for  a  single  tax  on 
land.  In  fact,  he  adds  in  another  place  that  "  particular 
caution  ought  at  present  to  be  observed  in  this  country,  not 
to  burden  the  soil  itself  and  its  productions  with  heavy 
impositions." 

An  eminent  French  writer,  M.  Leroy-Beaulieu,  has  fallen 
into  a  curious  error.  The  Physiocrats,  according  to  him, 
held  that,  even  if  the  single  tax  were  imposed,  the  landowners 
would  lose  nothing  because  their  products  would  rise  in  price 
and  would  thus  reimburse  the  proprietors  for  their  original 
outlay.^  This,  however,  is  a  mistake.  The  cardinal  doctrine 
of  the  Physiocrats  was  that  all  taxes  fall  ultimately  on  the 

1  "  I  have  not  lost  any  of  the  principles  of  public  economy  you  once  knew 
me  possessed  of.  .  .  .  Our  legislators  are  all  landowners,  and  they  are  not 
yet  persuaded  that  all  taxes  are  paid  by  the  land." — Letter  to  Mr.  Small,  17S7. 
In  The  Complete  Works  of  Benjamin  Franklin,  edited  by  John  Bigelow.  New 
York,  1887,  ix,  p.  414. 

2  "  Many  theorists  in  Political  Economy  have  held,  that  all  taxes,  wherever 
they  originate,  fall  upon  land,  and  have  therefore  been  of  the  opinion  that  it 
would  be  best  to  draw  the  whole  revenue  of  the  state  immediately  from  that 
source.  .  .  .  But  though  it  has  been  demonstrated  that  this  theory  has  been 
carried  to  an  extreme,  impracticable  in  fact,  yet  it  is  evident,  in  tracing  the  matter, 
that  a  large  part  of  all  taxes,  however  remotely  laid,  will,  by  an  insensible  cir- 
culation, come  at  last  to  settle  upon  land  —  the  source  of  most  of  the  materials 
employed  in  commerce." — The  Continentalist,  vi,  1782.  In  The  Works  of 
Alexander  Hamilton,  edited  by  Henry  Cabot  Lodge.  New  York,  1885,  i,  p. 
266. 

'  Science  des  Finances.  Par  Paul  Leroy-Beaulieu.  Paris,  1892,  5th  ed.,  i, 
p.  199.     The  mistake  is  repeated  in  the  7th  ed.,  1906,  i,  p.  275. 


The  Physiocratic   Theory  141 

landowners,  and  on  them  alone.^  It  was  just  because  the 
Physiocrats  supposed  that  the  tax  could  not  be  shifted  that 
they  advocated  the  single  tax.  The  landowners  would,  in- 
deed, in  their  opinion,  suffer  less  from  a  direct  tax  than  from 
an  indirect  tax  ;  for  not  only  would  the  indirect  taxes  yield  so 
little,  relatively,  that  higher  rates  would  be  necessary,  but 
they  would  tend  to  destroy  the  foundations  on  which  the 
prosperity  of  the  landowners  rested.  But  the  direct  tax, 
even  though  less  destructive,  would  still  remain  on  those 
on  whom  it  was  originally  imposed  —  the  owners  of  the 
soil. 

The  Physiocratic  doctrine  of  incidence  does  not  need  any 
formal  refutation.  Resting  on  the  peculiar  doctrine  of  the 
sole  productivity  of  agriculture,  it  has  been  convicted  of 
exaggeration  and  unreality.^  The  Physiocrats'  theory  of  dis- 
tribution and  their  conception  of  natural  law  may  be  said  to 
have  ushered  in  the  modern  period  of  economic  science. 
But  Adam  Smith,  who  was  in  these  respects  so  profoundly 
influenced  by  the  Physiocrats,  shattered  the  very  foundations 
on  which  their  third  fundamental  doctrine  —  that  of  the  pro- 
duit  7iet  —  was  based.     If  the  Physiocrats  developed  what 

^  "  Tout  impot  est  paye  par  le  produit  des  terres,  tout  ce  que  I'impot  prend  sur 
ce  produit,  apres  les  partage  fait  par  le  souverain,  forme  un  double  emploi;  tout 
double  emploi  retombe  sur  les  proprietaires  fonciers."  —  V  Ordre  Naturel,  etc. 
Par  Mercier  de  la  Riviere,  chap,  vii  (p.  504  of  Daire's  ed.).  "Tous  les  impSts 
sous  quelque  forme  qu'ils  soient  pergus  retombent  necessairement  k  la  charge  des 
proprietaires  des  biens  fonds,  et  sont  toujours  en  derniere  analyse  payes  par  eux 
seuls,  ou  directement,  ou  indirectement."  —  Explications  sur  l^effet  de  V Impbt 
Indirect,  in  CEuvres  de  Tttrgot  (Daire's  ed.)  i,  416. 

2  A  good  exposition  of  its  weakness  is  made  by  Arthur  Young  in  his  Political 
Arithmetic,  1774,  pp.  208-266.  The  best  contemporary  French  refutation  is  con- 
tained in  Essai  Analytique  sur  la  Richesse  et  sur  V Impot,  ou  Von  refute  la  nou- 
velle  doctrine  economique  .  .  .  sur  I'effet  des  Impots  indirects.  Par  Louis  Francois 
de  Graslin.  Londres,  1767.  Graslin  not  only  denies  that  the  so-called  indirect 
taxes  are  shifted  to  land,  but  contends  that  a  tax  imposed  directly  on  land  is  some- 
times shifted  to  the  consumer.  —  Ibid.,  pp.  230  et  al.  Another  work  very  widely 
read  at  the  time  was  the  anonymous  volume  written  to  answer  Mirabeau's  book 
on  taxation,  under  the  title  Doutes  proposes  a  VAuteur  de  la  Thiorie  de  I'Impdt. 
1761.  See  especially  pp.  24-48,  "Sur  quoi  doit-on  preferablement  faire  porter 
les  impositions  ?  " 


142  S /lifting  and  hicide^tce  of  Taxation 

might  be  called  the  agricultural  system  of  economics,  Adam 
Smith  is  responsible  for  the  industrial  system.  Yet  their 
theories  of  the  incidence  of  taxation,  apart  from  the  peculiar 
doctrine  of  the  prodnit  net,  are  not  so  dissimilar  as  might  be 
imagined.^ 

1  A  refutation  not  only  of  the  Physiocratic  doctrine  of  incidence,  but  of  that  of 
Smith  and  Ricardo,  is  attempted  at  great  length  in  On  Taxes  or  Public  Revenue, 
the  Ultimate  Incidence  of  their  Payment,  their  Disbursement,  and  the  Seats  of 
their  Ultimate  Consumption.  By  an  Officer  in  the  Military  and  Civil  Service  of 
the  Hon.  East  India  Company.  London,  1829.  The  chapter  devoted  to  the 
Physiocrats  is  more  successful  than  that  dealing  with  the  English  writers. 

The  Physiocratic  doctrines  were  reproduced  in  England  not  only  by  Spence 
but  by  two  anonymous  pamphleteers.  William  Spence,  the  author  of  Britain 
Independent  of  Commerce,  1808,  and  Agriculture  the  Source  of  the  Wealth  of 
Britain,  1 808,  is  discussed  by  H.  Higgs  in  The  Physiocrats,  1897,  PP-  J37-I39' 
The  anonymous  pamphlets  The  Essential  Principles  of  the  Wealth  of  Nations 
illustrated,  in  Opposition  to  some  False  Doctrines  of  Dr.  Adam  Smith  and  Others, 
1797,  and  Sketches  on  Political  Economy  Illustrative  of  the  Interests  of  Great 
Britain  ;  intended  as  a  Reply  to  Mr.  MilPs  Pamphlet  Commerce  Defended,  with 
an  Exposition  of  some  of  the  Leading  Tenets  of  the  Economists  are  discussed  in 
Seligman,  "On  Some  Neglected  British  Economists"  in  The  Economic  Journal, 
xiii  (1903),  pp.  4-7.  The  best  known  opponents  of  the  Physiocrats  in  England 
were  James  Mill  in  Commerce  Defended,  1808,  and  Robert  Torrens  in  The  Econo- 
mists Refuted,  i8o8.  But  the  writer  who  devoted  especial  attention  to  their 
doctrine  of  incidence  was  Daniel  Wakefield  in  An  Essay  upon  Political  Oecon- 
omy,  being  an  Inquiry  into  the  Truth  of  the  Two  Positions  of  the  French  Oecort' 
omists;  that  Labour  employed  in  Manufactures  is  Unproductive ;  and  that  all 
Taxes  ultimately  fall  upon,  or  settle  in  the  Surplus  Produce  of  Land,  1799. 
Wakefield's  own  conclusion  is  that  "taxes  settle  and  terminate,  if  direct,  on  any 
species  of  monopoly  income,  whether  arising  from  land,  capital,  stock  or  labour, 
in  such  income,  and  if  indirect,  on  commodities  in  the  way  of  customs  or  excise, 
upon  the  consumers  of  such  commodities."  —  Op.  cit.,  2d  ed.,  1804,  pp.  82-83. 


CHAPTER   II 
The  Absolute  Theory 

On  the  subject  of  the  incidence  of  taxation,  as  on  almost 
every  topic  of  economic  inquiry,  modern  views  are  commonly 
traced  back  to  the  works  of  Adam  Smith  and  Ricardo.  For 
reasons  that  will  soon  appear,  the  doctrines  advanced  by 
these  great  thinkers  may  be  summed  up  under  the  name  of 
the  absolute  theory  of  incidence. 

Adam  Smith  bases  his  investigation  on  the  division  of  all 
revenue  into  rent,  profits  and  wages.  All  taxes  on  land, 
says  he,  whether  proportional  to  the  rent  or  to  the  whole 
produce,  are  in  reality  taxes  on  rent.  Although  they  may 
be  originally  advanced  by  the  tenant,  they  are  finally  paid 
by  the  landlord.  A  tax  on  land  rent  necessarily  falls  on 
the  owner ;  for  the  "  farmer  computes,  as  well  as  he  can, 
what  the  value  of  the  (tax)  is,  one  year  with  another,  likely 
to  amount  to,  and  he  makes  a  proportionable  abatement  in 
the  rent  which  he  agrees  to  pay  to  the  landlord."  The 
farmer  must  have  his  reasonable  profit  as  well  as  every  other 
dealer.  Hence  "  the  more  he  is  obliged  to  pay  in  the  way 
of  tax,  the  less  he  can  afford  to  pay  in  the  way  of  rent."  ^ 
The  case  of  a  tax  on  house  rent  is  slightly  different,  because 
house  rent  is  really  distinguishable  into  two  separate  ingre- 
dients—  building  rent  and  ground  rent.  The  tax  on  ground 
rent,  like  that  on  the  rent  of  land,  will  inevitably  fall  on  the 
owner,  because  "  the  more  the  inhabitant  was  obliged  to  pay 
for  the  tax,  the  less  he  would  incline  to  pay  for  the  ground."* 

^  An  Inquiry  into  the  Nature  and  Causes  of  the  Wealth  of  Nations.  By 
Adam  Smith,  LL.D.  London,  1776,  book  v,  chap.  ii.  Vol.  ii,  pp.  417,  428,  The 
quotations  are  from  the  edition  of  James  E.  Thorold  Rogers,  2d  ed.,  Oxford,  1880. 

2  Ibid.,  ii,  pp.  437,  440. 

143 


144  Shifting  and  Incidence  of  Taxation 

But  that  part  of  the  rent  which  represents  the  building  rent 
is  simply  the  profits  of  the  capital  expended  in  building  the 
house.  This  part  of  the  tax  will  necessarily  fall  on  the  oc- 
cupier ;  because,  unless  the  builder  secures  the  same  return 
on  his  capital  as  other  business  men  do,  he  will  cease  build- 
ing houses  until  the  increased  demand  for  houses  again 
raises  the  rent  —  that  is,  in  this  case,  his  profits  —  to  the 
general  level.  A  tax  on  house  rent  will  therefore  fall  partly 
on  the  owner  and  partly  on  the  occupier,  but  "  in  what  pro- 
portion this  final  payment  would  be  divided  between  them, 
it  is  not  perhaps  very  easy  to  ascertain."  ^ 

Taxes  on  profits  are  simple  of  analysis.  The  profit  arising 
from  stock  is  divided  by  Adam  Smith  into  two  parts,  that 
which  pays  the  interest,  and  the  surplus  over  and  above  the 
interest.  A  tax  on  the  surplus  above  interest  is  always 
shifted,  for  this  surplus  is  the  "compensation  for  the  risk 
and  trouble  of  employing  the  stock"  which  the  employer 
must  have  if  he  desires  to  continue  the  employment.  It  will 
be  shifted  either  to  the  landowner  or  to  the  consumer,  ac- 
cording as  the  stock  is  employed  in  farming  or  in  mercantile 
business.^  For  if  he  employed  it  as  "  farming  stock,"  he 
could  raise  the  rate  of  his  profit  only  by  reducing  the 
amount  he  is  called  upon  to  pay  to  the  landlord,  —  that  is, 
the  rent.  But  if  he  employed  it  as  a  "  mercantile  or  manu- 
facturing stock,"  he  could  raise  the  rate  of  profit  only  by 
raising  the  price  of  his  goods. 

A  tax  on  interest  —  that  is,  on  what  Smith  regards  as  "the 
net  produce  which  remains  after  completely  compensating 
the  whole  risk  and  trouble  of  employing  the  stock"  — seems 
to  fall  entirely  on  the  owner,  just  as  in  the  case  of  a  tax  on 
rent.  But  in  reality  the  interest  on  money  is  a  much  less 
proper  subject  of  direct  taxation  than  rent,  because  land  is 
tangible  and  easily  ascertainable,  while  capital  is  not ;  and 
because  land  cannot  be  removed,  while  stock  easily  may  be. 
To  tax  stock,  therefore,  would  cause  its  removal  from  the 

'  An  Inquiry  into  the  Nature  and  Causes  of  the  Wealth  of  Amotions,  ii,  p.  434. 
•  Ibid.,  ii,  p.  441. 


The  Absolute   Theory  145 

country,  and  put  an  end  to  all  the  industry  which  it  had 
maintained.  This  would  reduce  not  only  the  profits  of 
stock,  but  also  the  rent  of  land  and  the  wages  of  labor.  A 
general  tax  on  profits,  therefore,  affects  other  classes  besides 
the  employer.^  A  tax  on  the  profits  of  stock  employed  in 
any  particular  branch  of  trade  will,  however,  be  shifted 
from  the  dealers  to  the  consumers  because  the  dealers 
must  "in  all  ordinary  cases  have  their  reasonable  profit." 
The  consumers  will  have  to  pay,  in  the  enhanced  price  of 
their  goods,  not  only  the  tax  advanced  by  the  dealer,  but 
generally  some  overcharge  in  addition.^ 

Taxes  on  wages,  finally,  are  always  shifted.  This  is  due 
to  the  fact  that  the  rate  of  wages  is  regulated  by  the  demand 
for  labor  and  by  the  average  price  of  food.  When  these 
remain  the  same,  a  direct  tax  on  wages  "  can  have  no  other 
effect  than  to  raise  them  somewhat  higher  than  the  tax."  If 
the  laborers  were  engaged  in  "manufacturing  labor,"  the 
employer  would  have  to  raise  wages,  but  would  ultimately  be 
obliged  to  charge  the  increase  with  a  profit  on  the  consumers. 
If  the  laborers  were  engaged  in  husbandry,  the  farmer  would 
in  the  long  run  pay  less  rent  to  the  landlord.  But  both  the 
reduction  of  the  rent  and  the  rise  of  price  will  be  greater 
than  the  amount  of  the  tax.^  Whenever  taxes  on  labor  have 
not  produced  a  proportionate  rise  in  wages,  it  is  because  they 
have  led  to  a  fall  in  the  demand  for  labor.  The  only  results 
of  this,  however,  have  been  a  "  declension  of  industry,  a 
decrease  of  employment,  and  a  diminution  of  the  annual 
produce  of  the  land  and  labor  of  the  country."  Even  then, 
wages  must  always  be  higher  than  they  would  otherwise  have 
been,  and  this  increase  of  price  must  be  finally  paid  by  the 
consumers.  The  same  argument  holds  good  of  the  "  recom- 
pense of  ingenious  artists  and  of  men  of  liberal  professions  "  ; 
but  it  does  not  apply  so  completely  to  "  the  emoluments  of 


*  "The  proprietor  of  stock  is  properly  a  citizen  of  the  woi 
sarily  attached  to  any  particular  country."  —  Ibid.,  ii,  p.  443. 


irld  and  is  not  neces- 


^  Ibid.,  ii,  p.  446, 
8  Ibid.,  ii,  p.  461 


146  Shifting  and  Incidence  of  Taxation 

offices,"  because  these  are  not  regulated  by  the  free  competi- 
tion of  the  market. 

Finally,  Adam  Smith  discusses  taxes  which  are  intended 
to  "fall  indifferently  on  every  species  of  revenue."  These 
are  capitation  taxes  and  taxes  on  consumable  commodities. 
Capitation  taxes,  so  far  as  they  are  levied  on  the  lower  classes, 
are  taxes  on  wages,  and  subject  to  the  same  objections  as 
those  taxes,  —  that  is,  they  are  shifted  to  the  consumers,-^ 
Taxes  on  commodities  are  levied  either  on  necessaries  or  on 
luxuries.  Taxes  on  necessaries  raise  the  rate  of  wages  (be- 
cause wages  are  fixed  partly  by  the  price  of  necessaries)  and 
fall  on  the  consumers  or  landlords.  They  act  precisely  like 
taxes  on  labor.  Taxes  on  luxuries,  on  the  other  hand,  will 
not  raise  wages,  but  will  fall  only  on  the  consumers  of  the 
particular  commodities.  So  far  as  the  poor  are  concerned, 
they  act  simply  as  sumptuary  laws.  It  is,  therefore,  always 
to  the  interest  of  the  richer  classes  to  oppose  taxes  on  neces- 
saries ;  for  all  taxes  on  necessaries  are  ultimately  paid  by 
them,  while  taxes  on  luxuries  fall  on  them  only  to  the  extent 
that  they  are  consumers  of  luxuries.^ 

If  we  sum  up  Adam  Smith's  doctrine  of  incidence,  we  see 
that  taxes  on  wages,  taxes  on  profits  (except  the  tax  on  inter- 
est), and  taxes  on  necessaries  are  always  shifted.  On  the 
other  hand,  taxes  on  land  and  taxes  on  luxuries  always  stay 
where  they  are  put.  The  classes  of  society  who  bear  all  the 
taxes  are  thus  primarily  the  landowners,  the  rich  consumers 
and,  to  a  certain  extent,  the  lenders  of  capital. 

Adam  Smith's  exposition,  marked  as  it  is  by  many  pro- 
found and  suggestive  ideas,  is  entirely  dependent  upon  his 
theories  of  rent,  profits  and  wages.  As  soon  as  we  question 
the  validity  of  his  theory  of  rent,  of  his  treatment  of  wages 
as  based  on  the  necessaries  of  life,  or  of  his  conception  of 
ordinary  profits,  a  large  part  of  his  doctrine  of  incidence  falls 
to  the  ground.  Modern  economic  theory  no  longer  accepts 
these  bases  of  his  theory.    Ricardo  himself  did  much  to  over- 

1  An  Inquiry  into  the  Nature  and  Causes  of  the  Wealth  of  Nations  ^  ii,  p.  466. 
"^  Ibid.,  ii,  p.  470, 


The  Absolute   Theory  147 

throw  them.  But  so  far  as  Adam  Smith  based  his  doctrine 
of  incidence  on  the  theory  of  free  competition  without  any 
quaHfications,  and  on  the  inevitable  action  of  simple  economic 
causes,  he  may  be  termed  in  a  certain  sense  the  forerunner 
of  the  absolute  theory  of  incidence. 

Ricardo's  Pri?iciplcs  of  Political  Economy  and  Taxation  is 
largely  devoted  to  the  latter  subject.  With  his  accustomed 
penetration,  Ricardo  went  at  once  to  the  core  of  tax  problems, 
so  that  his  work  consists  almost  exclusively  of  an  investiga- 
tion of  the  problem  of  incidence.  His  discussion  of  this  topic 
discloses  the  same  merits  and  the  same  defects  which  are  so 
characteristic  of  his  other  work.  On  the  one  hand,  profound 
and  acute  analysis,  marvellous  power  of  isolating  the  phe- 
nomena and  treating  them  as  unaffected  by  disturbing  causes  ; 
on  the  other  hand,  the  implication  that  the  hypothetical  case 
is  the  real  one,  the  inference  that  the  formulas  deduced  with 
mathematical  accuracy  and  logical  rigor  from  the  assumed 
premises  represent  the  actual  economic  facts  ;  —  these  char- 
acteristics constitute  at  once  the  strength  and  the  weakness 
of  the  Ricardian  theories. 

Ricardo,  like  Adam  Smith,  does  not  give  any  general  theory 
of  incidence.  In  both  cases  we  must  seek  for  the  general 
principles  of  the  authors  in  the  discussions  of  separate  taxes. 
Ricardo  differs  from  Adam  Smith  in  his  theory  of  rent  and 
in  his  doctrine  of  the  relation  of  profits  to  wages.  Ricardo's 
theory  of  economic  rent  leads  him  to  controvert  Adam  Smith's 
doctrine  of  the  ultimate  incidence  of  land  taxes  on  the  land- 
owner. A  tax  on  rent,  it  is  true,  says  Ricardo,  will  fall 
wholly  on  the  landlord ;  for  since  rent  is  the  surplus  above 
the  cost  of  production,  the  value  of  the  product  cannot  pos- 
sibly be  affected  by  the  tax.^  But  it  is  different  with  taxes 
on  produce,  tithes  or  land  taxes :  these  will  be  shifted  by  the 
landowners  to  the  consumers.     Since   price  is  fixed    by  the 

^  "  A  tax  on  rent  would  affect  rent  only;  it  would  fall  wholly  on  landlords,  and 
could  not  be  shifted  to  any  class  of  consumers." —  On  the  Principles  of  Political 
Economy  and  Taxation.  By  David  Ricardo,  Esq.  London,  1 817,  chap,  viii*, 
p.  221.     In  McCulloch's  edition,  1876,  this  is  found  in  chap,  x,  p.  102. 


148  Shifting  and  Incidence  of  Taxation 

cost  of  production  on  land  of  the  poorest  quality,  runs  his 
argument,  whatever  increases  cost  raises  price.  But  a  tax 
which  is  imposed  on  all  cultivators  necessarily  increases  the 
cost  of  production.  Hence,  a  tax  on  produce  raises  price  and  is 
shifted  to  the  consumers.  A  rise  in  price  is  the  only  means 
by  which  the  cultivator  can  pay  the  tax  and  continue  to 
derive  "the  usual  and  general  profits  "  from  the  employment 
of  his  capital.  He  cannot  deduct  the  tax  from  his  rent,  for 
there  is  no  rent  on  the  land  which  fixes  price.  He  will  not 
deduct  it  from  his  profits,  because  there  is  no  reason  why  he 
should  stay  in  an  employment  with  smaller  profits.  He  can, 
therefore,  pay  the  tax  only  by  increasing  the  price.^ 

All  land  taxes,  accordingly,  except  the  tax  on  pure  rent,  will, 
according  to  Ricardo,  fall  on  the  consumers.  But  although 
every  one  is  a  consumer,  not  all  consumers  will  pay  the  tax. 
One  large  class,  in  particular,  will  remain  exempt  —  the 
laborers ;  for  a  tax  on  raw  produce,  like  any  tax  which  in- 
creases the  price  of  necessaries  of  life,  will  inevitably  raise 
wages.  "  Wages  never  continue  much  above  that  rate  which 
nature  and  habit  demand  for  the  support  of  the  labourer." 
But  as  wages  rise,  profits  must  fall.  A  land  tax  will  there- 
fore fall  not  on  the  landlord  or  the  stockholders,  but  on  the 
capitalist  employer  of  labor.^ 

The  question  still  remains  whether  the  employer  can  shift 
the  tax.  In  other  words  :  What  is  the  incidence  of  a  tax  on 
profits .''  Ricardo  agrees  with  Adam  Smith  in  holding  that  a 
tax  on  the  profits  of  a  particular  class  will  be  shifted  to  the 
consumers  through  a  rise  in  price.  But  in  the  case  of  a  tax 
on  all  profits,  the  problem  is  less  simple.  If  no  attention  be 
paid  to  foreign  trade,  a  rise  of  prices  will  ensue.  But  since 
money   is    a   commodity    imported    from    abroad,   a   rise    in 

1  On  the  Principles  of  Political  Economy  and  Taxation,  chap,  viii,  pp.  194, 
195,  and  chap,  ix,  p.  225.  In  McCulloch's  ed.  these  are  chap,  ix,  p.  91 ;  and 
ch»p.  xi,  p.  104. 

2  Ibid.,  p.  199  (McCulloch's  ed.,  p.  93).  Ricardo  seeks  to  prove  that  there 
will  not  be  any  considerable  interval  between  the  rise  in  the  price  of  corn  and 
the  rise  of  wages,  during  which  the  laborer  would  suffer.  Here,  as  elsewhere, 
however,  his  conclusions  are  too  rigid. 


The  Absolute   Theory  149 

prices,  if  it  occurred,  could  not  be  permanent.  In  return  for 
commodities  imported,  the  dear  goods  could  not  be  exported. 
On  the  contrary,  money  would  be  exported  until  prices  had 
fallen  to  their  former  level.  The  inference  is  that  a  tax 
on  profits  will  be  borne,  not  by  the  consumer,  but  by  the 
producer.^ 

Finally,  a  tax  on  wages,  he  contends,  will  raise  wages. 
Ricardo  here  discusses  the  objections  raised  by  Buchanan  to 
the  doctrine  of  Adam  Smith.  He  does  indeed  make  the  two 
important  concessions  that  every  rise  in  the  price  of  necessa- 
ries does  not  necessarily  raise  wages,  and  that  wages  are  not 
generally  increased  by  the  amount  of  the  tax.^  But  with  his 
characteristic  fondness  for  the  larger  aspects  of  a  problem,  he 
goes  on  to  argue  as  if  these  concessions  did  not  invalidate  his 
general  doctrine.    On  the  assumption,  then,  that  taxes  do  raise 

1  "  It  appears  to  me  absolutely  certain  that  a  well-regulated  tax  on  profits 
would  ultimately  restore  commodities,  both  of  home  and  foreign  manufacture,  to 
the  same  money  price  which  they  bore  before  the  tax  was  imposed."  —  Ibid., 
chap,  xiii,  p.  283.  (McCulloch's  ed.,  chap,  xv,  p.  127.)  Cf.  chap,  xvi,  pp.  354, 
355.     (McCulloch's  ed.,  chap,  xviii,  p.  155.) 

2  "  It  must  therefore  be  conceded  to  Mr.  Buchanan  that  any  rise  in  the  price 
of  provisions  occasioned  by  a  deficient  supply  will  not  necessarily  raise  the  money 
wages  of  labor.  Taxes  so  far  as  they  impair  the  net  capital  of  the  country  dimin- 
ish the  demand  for  labor,  and  therefore  it  is  a  probable,  but  not  a  necessary,  nor  a 
peculiar  consequence  of  a  tax  on  wages,  that  though  wages  would  rise,  they  would 
not  rise  by  a  sum  precisely  equal  to  the  tax."  —  Ibid.,  chap,  xiv,  pp.  288,  289,  297. 
(McCulloch's  ed.,  chap,  xvi,  pp.  130,  133.)  Yet  in  the  very  next  paragraph  he 
says  that  he  agrees  with  Adam  Smith. — In  the  first  edition,  181 7,  pp.  492-3 
Ricardo  states  that  of  the  three  shares  in  distribution,  wages,  profits,  and  rent,  "it 
is  from  the  two  last  portions  only  that  any  deductions  can  be  made  for  taxes 
or  for  savings;  the  former,  if  moderate,  constituting  always  the  necessary  expenses 
of  production."  In  the  3d  edition,  1821,  p.  416  [  Works,  McCulloch's  ed.,  p.  210] 
he  adds :  Perhaps  this  is  expressed  too  strongly,  as  more  is  generally  allotted  to 
the  labourer  under  the  name  of  wages  than  the  absolutely  necessary  expenses 
of  production." 

Professor  Hollander,  Letters  of  Ricardo  to  McCulloch,  American  Economic 
Association,  1895,  pp.  60-61,  adds  an  interesting  note  from  a  manuscript  gloss  by 
Ricardo  himself  in  the  copy  of  his  work  preserved  in  the  library  at  Gatcomb 
Park.  In  this  Ricardo  further  concedes  that  "the  labourer  will  certainly  be 
exposed  to  great  inconvenience  till  the  new  state  of  things  shall  become  estab- 
lished." Professor  Hollander  ascribes  this  concession  to  the  influence  of 
McCulloch.     See  below,  p.  198. 


1 50  Shifting  and  Incidence  of  Taxation 

wages,  Ricardo  concludes  that  they  inevitably  decrease  prof- 
its.^ He  objects,  however,  to  Adam  Smith's  contention  that 
the  tax  will  be  shifted  to  the  consumers.  For,  says  he,  since 
all  producers  are  consumers  of  each  other's  goods,  every 
dealer  would  raise  his  prices  by  the  increase  which  he  is 
compelled  to  pay;  and  this  process  would  go  on  indefinitely, 
which  is  absurd.2  Since  the  tax  would,  therefore,  rest  on 
profits,  it  is  immaterial  whether  the  taxes  be  levied  on  profits 
or  on  wages.  It  is  always  the  profits  of  stock  on  which  these 
taxes  ultimately  fall. 

It  will  be  readily  seen  that  these  teachings  of  Ricardo 
depend  on  the  wage-fund  theory,  on  his  doctrine  of  profits, 
and  on  the  law  of  economic  rent.  They  stand  or  fall  with 
the  acceptance  or  rejection  of  his  general  theory  of  dis- 
tribution. Two  points,  however,  must  be  brought  promi- 
nently forward  —  on  the  one  hand,  the  difference  between 
Adam  Smith  and  Ricardo  in  results ;  on  the  other,  the  sim- 
ilarity in  their  methods. 

Adam  Smith,  as  we  saw,  holds  that  the  landowners  ulti- 
mately pay  most  of  the  taxes,  bearing  as  they  do  all  the  taxes 
on  land,  and  a  great  part  of  the  taxes  on  wages  and  profits. 
The  "  rich  consumers  "  pay  a  smaller  part,  and  the  lenders 
of  capital  still  less.  On  the  other  hand,  Ricardo  maintains 
that  the  landowner  pays  only  the  taxes  on  rent  proper,  but 
shifts  all  the  other  taxes  on  land.  Both  Ricardo  and  Adam 
Smith  agree  that  wages  can  never  be  reached  by  a  tax ;  but 
Adam  Smith  regards  the  landowners,  while   Ricardo   looks 

1  "Taxes  on  wages  will  raise  wages  and  therefore  will  diminish  the  rate  of  the 
profits  of  stock  .  .  .  The  only  difference  between  a  tax  on  necessaries  and  a  tax 
on  wages  is  that  the  former  will  necessarily  be  accompanied  by  a  rise  in  the  price 
of  necessaries  but  the  latter  will  not.  ...  A  tax  on  wages  is  wholly  a  tax  on 
profits,  a  tax  on  necessaries  is  partly  a  tax  on  profits  and  partly  a  tax  on  rich  con- 
sumers." —  On  the  Principles  of  Political  Economy  and  Taxation^  p.  285. 
(McCulloch's  ed.,  p,  129.) 

2  "  If  they  could  all  raise  the  price  of  their  goods  so  as  to  remunerate  themselves 
with  a  profit  for  the  tax:  as  they  are  all  consumers  of  each  other's  commodi- 
ties, it  is  obvious  that  the  tax  could  never  be  paid  ;  for  who  would  be  the  con- 
tributors if  all  were  compensated  ?"  — Ibid.,  p.  303.     (McCulloch's  ed.,  p.  135.) 


The  Absolute   Theory  151 

upon  the  recipients  of  profits  of  stock,  as  the  real  taxpayers 
of  the  country.  The  one  may  be  called  the  unconscious 
advocate  of  the  landed  interest,  the  other  of  the  moneyed 
interest. 

But  while  they  differ  in  result,  they  largely  agree  in 
method.  What  Roscher  calls  the  "  magnificent  abstractions  " 
of  Ricardo  are  perhaps  the  more  impressive.  In  his  reason- 
ing, no  allowance  is  made  for  conditions  or  qualifications. 
The  law  of  competition  is  assumed  as  perfect  in  its  opera- 
tions. The  absolute  transferability  of  capital  and  labor  is 
presupposed.  The  most  far-reaching  hypotheses  are  posited, 
in  the  belief  —  or,  at  all  events,  with  the  resulting  belief  on 
the  part  of  the  unwary  reader  —  that  they  are  exemplifica- 
tions of  actual  facts.  Everything  is  reduced  to  its  simplest 
form.  The  compHcated  questions  of  industrial  society  are 
treated  as  more  or  less  plain  arithmetical  problems.  Even 
though  Ricardo's  fundamental  theory  of  distribution  were 
correct,  his  doctrine  of  incidence  would  thus  be  incomplete. 
It  might,  perhaps,  be  true  so  far  as  it  went,  but  it  would  even 
then  not  go  far  enough  to  explain  actual  phenomena.  It 
fails  to  notice  the  practical  effects  of  economic  friction. 
However  much  we  may  marvel  at  his  power  of  analysis,  we 
instinctively  regard  his  conclusions  with  some  suspicion. 
Ricardo's  doctrine  of  incidence  is  in  some  respects  prema- 
ture and  inadequate.  Because  of  its  rigidity  and  unyielding 
abstraction,  it  may  be  called  par  excellence  the  absolute 
theory. 


CHAPTER    III 
The  Equal-diffusion  Theory 

The  germ  of  this  doctrine  can  be  found  in  the  work  of  a 
renowned  Italian  economist  of  the  eighteenth  century,  Verri. 
He  lays  down  the  general  principle  that  every  tax  naturally 
tends  to  bring  about  an  equilibrium  because  it  strikes  every 
one  according  to  his  consumption.^  If  the  tax  is  levied  on 
land,  the  prices  of  agricultural  products  will  rise ;  if  on  wares 
and  manufactured  commodities,  the  merchants  and  artisans 
will  demand  more ;  if  on  the  working  classes,  they  will 
necessarily  exact  higher  wages.  Thus  taxes  always  have  an 
expansive  force ;  they  tend  to  seek  a  level  in  a  continually 
larger  sphere.  From  this  point  of  view  it  would  appear  to 
make  no  difference  whether  taxes  were  imposed  on  one  class 
or  on  another.^ 

But,  after  proving  to  his  satisfaction,  in  detail,  that  taxes 
tend  "  to  diffuse  and  to  equalize  themselves  on  consumption  "  ^ 
Verri  maintains  that  this  ostensible  law  of  indifference  is  not 
really  defensible.  For  this  equalization  of  the  burden  of  taxa- 
tion always  involves  a  continual  struggle  —  a  state  of  war  — 
or,   as   he   puts  it  in  another  place,  a  condition  of   revolu- 

1  "  Ogni  tribute  naturalmente  tende  a  livellarsi  uniformemente  su  tutti  gl'  indi- 
vidui  di  uno  stato  a  proporzione  delle  consumazioni  di  ciascuno."  —  Meditazione 
sulla  Economia  Politica.  Di  Pietro  Verri  Milanese.  1771,  p.  xxx.  Cf.  Custodi's 
Collection  of  Scrittori  Classici  Italiani  di  Economia  Politica,  Parte  Moderna, 
tomo  XV,  p.  244.     Milan,  1804. 

2  "  Cosi  il  tributo  ha  sempre  una  forza  espansiva  per  cui  tende  a  livellarsi  sulla 
sfera  piu  vasta  che  si  puo.  Riguardato  da  questo  canto  solo,  parebbe  indifferente 
che  ei  cadesse  piu  su  di  una  classe  d'  uomini  che  su  di  un'  altra."  —  Ibid.,  p.  247. 

^  "Chi  piu  consuma  piii  contribuisce  al  tributo;  e  il  tributo,  siccome  dissi,  si 
diffonde  e  conguaglia  sulle  consumazioni."  —  Ibid.,  p.  253. 

152 


The  Equal-diffusion   Theory  153 

tion,  between  individuals  and  classes.^  When  the  tax  is 
imposed  in  first  instance  on  the  rich  and  powerful,  they  can 
easily  shift  it  to  the  poor  and  weak  ;  but  when  the  tax  is 
assessed  directly  on  the  weak,  the  shifting  and  equalization 
will  take  place  slowly  and  with  all  those  delays  and  obstacles 
which  occur  when  the  poor  try  to  get  justice  from  the  rich. 
These  intervals,  Verri  concludes,  between  the  impulse  and 
the  final  repose  form  the  most  important  crises  in  national 
life,  and  are  especially  to  be  borne  in  mind  in  considering 
each  transfer  of  taxation. ^  Verri  accordingly  is  a  strong 
advocate  of  the  exemption  of  the  poorer  classes  from  taxation. 
A  few  years  even  before  Verri,  the  idea  was  advanced  by 
an  Englishman,  Lord  Mansfield.  "  I  hold  it  to  be  true," 
said  Mansfield,  "  that  a  tax  laid  in  any  place  is  like  a  pebble 
falling  into  and  making  a  circle  in  a  lake,  till  one  circle 
produces  and  gives  motion  to  another,  and  the  whole  circum- 
ference is  agitated  from  the  centre."^  Mansfield,  however, 
made  no  further  application  of  the  doctrine.  Several  years 
later,  Dickson  *  described  the  process  of  the  shifting  of  taxes, 
which  he  thought  would  result  in  a  situation  where  all  per- 
sons concerned  would  finally  bear  a  just  proportion  of  the 
increase  of  price  due  to  the  tax.^ 

-  "  Questo  conguaglio  e  questa  suddivisione  del  tribute  e  sempre  uno  state  di 
guerra  fra  ceto  e  ceto  d'  uomini."  "  II  tempo  che  trascorre  fra  la  imposizione  del 
tribute  e  il  conguaglio,  e  un   tempo  di  guerra  e   di  rivoluzione."  —  Ibid.,  pp, 

253.  254. 

2  "  Quando  il  possessore  e  il  cittadino  che  ha  fondi  debbono  anticipare  il  tribute, 
la  suddivisione  nel  minute  pepolo  si  fa  sollecitamente  e  con  poco  estacelo,  perche 
egli  &  il  potente  che  richiede  ragione  dal  debele;  ma  quando  il  tribute  imme- 
diatement  cada  di  prime  slancio  sulla  classe  del  debele,  la  suddivisione  si  farh,  ma 
con  queila  lentezza  e  con  quegli  ostacoli  che  debbon  nascere  quando  il  dcbole  e 
povere  cerca  ragione  dal  ricco  e  potente.  Questi  intervalli  fra  1'  impulse  e  la 
quiete  seno  le  crisi  piii  important!  negli  stati,  e  sono  ben  da  osservarsi  in  ogni 
cambiamento  di  tribute."  —  Ibid.,  p.  254. 

*"  Speech  en  Taxing  the  Colonies,"  1766.  In  Lord  Mansfield's  Collected 
Speeches.     Quoted  by  F.  A.  Walker,  The  Wages  Question,  p.  316. 

*  An  Essay  on  the  Causes  of  the  Present  High  Price  of  Provisions  as  connected 
with  Luxury,  Currency,  Taxes,  and  National  Debt.  [By  Adam  Dickson.]  Lon- 
don, 1773. 

^  "  In  the  payment  of  taxes,  no  man  is  a  patriot;   every  person  endeavors  to 


154  Shifting  and  Incidence  of  Taxation 

Another  English  writer  of  about  the  same  date  thought 
that  a  tax  inevitably  tends  to  raise  the  prices  of  all  commodi- 
ties, including  those  not  taxed ;  ^  "  for  taxes,  like  the  various 
streams  which  form  a  general  inundation,  by  whatever  chan- 
nels they  separately  find  admission,  unite  at  last  and  over- 
whelm the  whole."  ^  Every  one,  therefore,  really  bears  a 
part  of  the  burden,  even  if  the  tax  is  not  imposed  upon  him. 
In  still  another  work,  written  toward  the  end  of  the  eigh- 
teenth century  by  John  Young,  the  same  idea  is  expressed 
somewhat  more  fully .^     Young  maintains  that  taxes  not  only 

evade  them,  or  to  oblige  others  to  reimburse  him  for  what  he  pays.  The  first  can 
only  be  done  in  a  small  degree,  the  last  is  the  method  commonly  taken.  When  a 
tax  is  laid  upon  any  manufacture,  the  manufacturer,  in  order  to  carry  on  trade  to 
the  same  extent  as  formerly,  must  either  borrow  money  for  which  he  must  pay 
interest,  or  he  must  purchase  at  a  longer  credit,  which,  with  respect  to  his  sell- 
ing, is  the  same  thing  with  purchasing  at  a  higher  price.  He  must,  therefore,  lay 
upon  the  commodities  which  he  sells  the  interest  of  the  money  which  he  borrows, 
or  the  additional  price  which  he  pays  for  the  materials  which  he  manufactures. 
Besides  this,  he  lays  upon  the  price  of  these  commodities  the  whole  tax  which  he 
pays.  This  at  least  with  all  his  address  he  endeavors  to  do.  The  persons  that 
consume  the  commodities  which  he  manufactures,  finding  the  prices  of  these 
raised,  instead  of  retrenching,  which  is  commonly  a  disagreeable  thing,  endeavor 
in  their  turn  to  raise  the  prices  of  the  commodities  in  which  they  deal.  Thus,  if 
the  tax  makes  a  very  considerable  difference,  the  prices  are  raised  in  a  rotation, 
and  at  last  come  to  the  manufacturer  where  the  rise  began,  who,  in  consequence 
of  this,  if  in  his  power,  begins  another  rise,  which  every  person  will  endeavor  to 
push  around  in  the  same  manner,  so  that  a  heavy  tax  naturally  raises  the  prices  of 
commodities  gradually,  till  such  time  as  they  are  fixed  in  such  a  state  as  to  make 
all  persons  concerned  bear  a  just  proportion  of  it."  —  An  Essay,  pp.  66-67.  V^Y 
Adam  Dickson.]     London,  1773. 

1  "  Besides  this,  every  new  tax  does  not  only  affect  the  price  of  the  commodity 
on  which  it  is  laid,  but  that  of  all  others,  whether  taxed  or  not,  and  with  which, 
at  first  sight,  it  seems  to  have  no  manner  of  connection.  Thus,  for  instance,  a  tax 
on  candles  must  raise  the  price  of  a  coat,  or  a  pair  of  breeches;  because,  out  of 
these,  all  the  taxes  on  the  candles  of  the  wool-comber,  weaver,  and  the  tailor, 
must  be  paid :  A  duty  upon  ale  must  raise  the  price  of  shoes;  because  from  them 
all  the  taxes  upon  ale  drank  by  the  tanner,  leather-dresser,  and  shoe-maker, 
which  is  not  a  little,  must  be  refunded."  —  Thoughts  on  the  Causes  and  Conse- 
quences of  the  Present  High  Price  of  Provisions,     London,  1767,  pp.  4,  5. 

2  Ibid.,  p.  5. 

'  Essays  on  the  following  Interesting  Subjects :  viz.,  I  Government,  II  Revo- 
lution, etc.,  etc.,  VII  Taxation,  and  VIII  The  Present  War.  By  John  Young, 
D.D.     Glasgow,  4th  ed.,  1794.     The  first  ed.  appeared  also  in  1794. 


The  Equal-diffusion   Theory  1 5  5 

raise  the  price  of  the  commodities  taxed,  but  tend  to  lower 
the  value  of  money,  and  thus  to  raise  the  prices  of  all  other 
commodities.  Ultimately,  says  he,  they  also  increase  wages. 
But  laborers,  providing  they  are  willing  to  live  on  the  prod- 
uce of  the  country  and  be  clad  as  their  fathers  were,  in  their 
own  manufacture,  "  pay  practically  nothing  to  government 
and  yet  get  higher  wages."  "Thus  it  appears,"  observes 
Young,  "  that  though  taxes  newly  imposed  must  be  burden- 
some ;  because  they  take  from  the  people  so  much  of  what 
was  formerly  their  own  ;  yet  the  longer  they  continue,  they 
become  the  lighter :  and,  in  process  of  time,  they  cease  to  be 
a  burden  at  all."  ^  "This  may  be  thought  a  bold  assertion," 
adds  Young,  "  but  it  is  capable  of  demonstration."  ^ 

Perhaps  the  most  interesting  and  original  exposition  of 
the  doctrine  was  made  at  about  the  same  time  by  Andrew 
Hamilton,  in  a  separate  work  on  taxation  which  purported  to 
be  "  the  first  regular  attempt,  which  has  been  made,  to  supply 
this  important  chasm,  in  the  science  of  government."^  As 
no  reference  to  this  work  has,  so  far  as  I  know,  ever  been 
made  by  subsequent  writers,  it  will  be  discussed  at  some 
length. 

The  third  "Enquiry"  in  the  second  book  bears  the  title: 
"concerning  the  question,  on  whom  do  taxes  fall.-*"*  Ham- 
ilton draws  a  sharp  distinction  between  what  he  calls  the 
Payers  of  Taxes  and  the  Bearers  of  Ta.xes,  the  first  class 
being  also  termed  the  Advancers  of  Taxes,^  and  he  objects 
to  the  conclusion  of  both  the  "  Economists  "  and  Adam  Smith 
as  "hypothetical  and  uncertain,"  and  springing  not  from  ex- 
perience but  "from  the  theories  of  the  speculative."^  For 
it  should  be  remembered  that  besides  these  abstract  ten- 
dencies, there  are  other  and  more  powerful  circumstances 
occurring  in  the  business  of  a  great  nation,  whose  contingent 

"^  Ibid.,  p.  128.  2 //;;</.,  p.  125. 

^  An  Enquiry  into  the  Principles  of  Taxation,  chiefly  applicable  to  Articles  of 
immediate  Consumption.  [By  Andrew  Hamilton.]  London,  1790.  Hamilton 
was  a  professor  at  Aberdeen.  An  octavo  edition  of  the  original  quarto  volume 
appeared  the  following  year. 

*  Op.  cit.,  p.  134.  ^  Ibid.,  pp.  146-147.  ^  Ibid.,  pp.  142-143. 


156  Shifting  and  Incidence  of  Taxation 

and  unforeseen  effects  are  continually  coming  in  to  pre- 
vent taxes  from  falling  in  the  manner  we  should  be  ready 
to  suppose. 

Hamilton  points  out  that  in  the  course  of  progress  the 
principal  improvements  in  society  consist  of  "  the  invention 
of  machinery,  the  subdivision  of  labour  and  the  growth  of 
dexterity,  exertion  and  skill  in  the  labourer."  Each  of  these 
furnishes  a  fund  for  the  payment  of  taxes,  for  however 
the  tax  is  advanced,  it  is  paid  for  out  of  the  surplus  derived 
from  the  improvement.^  To  the  claim  that  these  improve- 
ments would  come  at  all  events,  Hamilton  rejoins  that  on 
the  contrary  they  are  due,  directly  or  indirectly,  "  to  the 
peace  and  security  afforded  by  good  government,"  and 
that  taxes  must  be  regarded  as  a  "compensation  for  the 
blessing  of  government."  It  is  hence  illegitimate  to  attempt 
to  solve  the  problem  "  by  comparing  the  present  situation 
of  men  paying  taxes  with  what  we  may  suppose  their 
situations  would  have  been,  had  no  such  taxes  existed." 
Philosophers  of  the  first  rank  like  Adam  Smith  have  fallen, 
he  thinks,  into  this  error.  "  They  knew  taxes  must  fall 
somewhere,  i.e.  be  paid  out  of  some  fund,"  but  their  account 
of  these  funds  is  "not  only  untrue  but  mischievous."  For 
the  real  fund  is  the  economic  improvement  of  society. 
When  this  exists,  the  individual  may  indeed  pay  the  tax, 
but   he  does   not  really  bear  the  burden.^     Hamilton  con- 

1  It  is  rather  the  improvements  and  the  thriving  situation  of  the  society  at 
large  that  may  be  said  to  sustain  the  taxes,  than  the  individuals  who  merely  pay 
them."  —  An  Enquiry  into  the  Principles  of  Taxation,  p.  158. 

2  "If  in  a  course  of  years  the  peace  and  security  afforded  by  government  have 
enabled  men  to  make  improvements  by  which  they  either  increase  their  fortune 
or  get  more  in  exchange  for  it,  they  ought  in  justice  to  pay  a  small  part  of  the 
advantages  they  have  obtained  to  that  government  which  has  conduced  so  much 
to  their  obtaining  them.  If,  in  this  situation,  a  new  tax  should  take  a  part  of  such 
gains  from  them,  I  would  not  say  that  the  tax  falls  on  them  because  it  renders 
them  less  rich  than  they  would  have  been,  but  comparing  their  situation  before 
the  improvement  and  before  the  tax  with  what  it  is  since  both  took  place,  and 
finding  it  now  better  than  it  was  before,  I  would  say  indeed  that  they  pay  the 
tax  (if  I  could  be  sure  they  really  did  so),  but  not  that  it  falls  on  or  is  borne  by 
them."  —  Op.  cit.,  p.  161. 


The  Equal-diffusion  Theory  157 

eludes  therefore  that  a  tax  "  will  be  absorbed,  as  it  were,  by 
every  improvement  and  be  lightened  or  annihilated,  according 
to  the  degree  and  number  of  the  improvements  which  it 
meets  with;  i.e.  instead  of  becoming  heavier,  taxes  will  be- 
come lighter,  in  proportion  to  the  number  of  hands  through 
which  they  pass  in  a  thriving  society."^  But  "in  order  to 
shew  that  improvements  furnish  funds  for  taxes,  it  is  not 
necessary  that  we  should  be  able  accurately  to  trace  the 
manner  in  which  improvements  insinuate  themselves  through 
society ;  nor  how  a  tax  is  diffused  among  the  various  classes 
of  citizens."  ^ 

It  may,  however,  be  asked :  what  happens  when  improve- 
ments are  not  continually  made  ?  Here  Hamilton  thinks 
that  it  depends  on  "the  general  state  of  demand."^  He 
discusses  the  various  hypotheses  that  "  demand  may  be  ex- 
cited by  a  deficiency  of  supply,"  or  that  "  taxes  may  operate 
in  "  stunting  the  effective  demands,"  or  finally  that  demand 
may  so  relieve  the  traders  that  taxes  are  paid  back  to 
the  advancers  of  them,  in  the  price  of  a  taxed  article."* 
That,  however,  does  not  end  the  matter,  for  "  demand  may 
be  conceived  so  great  and  so  general  as  to  prevent  taxes 
from  falling  anywhere  for  a  very  considerable  time."  "To 
illustrate  this,"  he  adds,  "  let  us  suppose  a  tax  on  some  great 
necessary  of  life  which  all  consume.  That  the  demand  for 
labour  raises  its  wages ;  that  merchants  and  manufacturers 
get  their  prices  ;  that  the  demand  for  products,  etc.,  raises  the 
price  of  the  produce  of  land  ;  and  that  the  growing  demand 
for  land  raises  the  rent  of  the  landlord.  In  such  a  case 
the  tax  would  be  thrown  round  in  a  circle  by  the  mere 
force  of  a  general  increasing  demand,  and  would,  while 
this  continued,  be  prevented  from  falling  anywhere."  "^ 

The  question  thus  arises :  what  happens  to  the  ultimate 
consumer }  Hamilton  thinks  that  the  consumer  also  may 
be  relieved  indirectly  "  if  the  demand  for  another  article 
different  from  the  one  taxed  were  to  enable  a  consumer  to 

»  Op.  cit.,  p.  159.  "^  Ibid.,  p.  156.  ^  Ibtd.,  p.  1C5. 

^  Ibid.,  pp.  165,  168,  170.  ^  Ibid.,  p.  179. 


158  Shifting  and  Incideiice  of  Taxatio7i 

pay  the  tax."  ^  The  real  relief,  however,  of  the  consumers 
from  taxes,  Hamilton  thinks,  must  arise  from  the  extension 
of  the  market,  and  this  relief  is  generally  afforded  in 
thriving  societies."^  He  concedes,  however,  that  when 
these  conditions  of  demand  do  not  obtain,  taxes,  by  resting 
on  them,  may  "  both  accelerate  and  aggravate  the  ruin  of 
unfortunate  individuals."  ^  The  general  conclusion,  then,  is 
that  "in  stationary  and  declining  societies,  taxes  on  consump- 
tion fall  universally  on  all  ranks;  and  in  thriving  societies 
attach  themselves  to  those  citizens  who  are  unprosperous  at 
the  time.'* 

In  this  interesting  exposition,  several  points  are  to  be 
noticed.  In  the  first  place,  although  Hamilton  limits  the 
theory  in  terms  to  taxes  on  consumable  commodities,  the 
reasoning  is  equally  applicable  to  many  other  forms  of  taxes. 
We  are  therefore  justified  in  calling  it  a  general  theory. 
In  the  second  place,  Hamilton  employs  "  absorption "  as 
well  as  "  diffusion "  as  interchangeable  terms,  so  that  he 
may  be  called  not  only  the  founder  of  the  diffusion  theory, 
but  also  the  originator  of  the  absorption  theory  of  incidence." 

^  An  Enquiry  into  the  Principles  of  Taxation,  p.  171.  This  argument  is  un- 
satisfactory, because  the  alleged  indirect  relief  to  the  consumer  is  derived  from 
a  concomitant  increase  in  the  demand  for  the  commodities  produced  by  the  con- 
sumer. But  this  increase  is  entirely  irrespective  of  the  tax.  Hamilton  virtually 
concedes  this  when  he  says  (p.  174)  :  "This,  to  be  sure,  is  an  indirect  relief  from 
the  tax,  springing  from  a  cause  very  different  from  and  perhaps  no  way  connected 
with  the  tax  itself." 

2  Op.  cit.,  p.  182. 

^  Ibid.,  p.  181. 

*  Op,  cit.,  pp.  182-183.  Moreover,  adds  Hamilton,  "  as  demand  determines 
where  taxes  are  to  fall,  and  as  it  is  fluctuating  in  its  nature  and  ever  varying,  so 
the  uncertainty  of  these  variations  must  render  it  altogether  impossible  to  foretell 
where  any  tax  is  to  fall  ;  and  although  we  could  tell  where  it  did  fall  to-day,  yet  a 
sudden  change  of  circumstances,  altogether  out  of  our  power,  might  determine  it 
to  fall  on  a  different  fund,  or  a  different  class  of  citizens,  to-morrow."  — IbiJ.,  p.  190. 

^  When  the  present  writer  suggested  the  term  "  absorption  theory"  for  the  doc- 
trine of  capitalization  (Presidential  address  on  "  Social  Aspects  of  Economic  Law" 
in  Publications  of  the  American  Economic  Association,  1904,  p.  66)  he  was  un- 
aware of  the  fact  that  it  had  been  used  over  a  century  before  as  synonymous  with 
the  diffusion  theory.  See  below,  last  chapter  of  this  work.  In  addition  to  the 
passage  on  page  159  of  Hamilton's  book,  mentioned  above,  he  speaks  in  various 


The  Equal-diffMsio7t  Theory  1 5  9 

In  the  third  place,  Hamilton  concedes  that  the  diffusion 
(or  what  he  calls  the  absorption)  of  taxes,  while  general 
or  probable,  is  not  inevitable,  since  cases  may  arise  where  the 
tax  is  borne  by  the  one  who  pays  it  in  first  instance.  In  this 
respect  Hamilton  shows  more  perspicacity  than  most  of  the 
upholders  of  the  diffusion  theory.  Altogether,  it  is  a  very 
remarkable  contribution  which  ought  not  to  have  suffered 
complete  oblivion.^ 

Verri,  as  well  as  the  English  writers,  however,  seems  to 
have  passed  unnoticed.  The  theory  in  its  modern  form  really 
dates  back  to  the  celebrated  book  of  Canard,^  which  has  now 
become  so  rare  as  to  justify  a  somewhat  fuller  treatment. 

Canard  expounds  his  views  in  a  work  avowedly  written  to 
disprove  the  Physiocratic  theory  of  incidence.  According  to 
him,  there  is  not  only  a  natural  labor,  —  that  is,  labor  neces- 
sary to  sustain  existence,  —  but  also  what  he  calls  acquired 
labor,  as  well  as  superfluous  labor.  These  three  kinds  of 
labor  lay  the  foundation  of  all  surpluses  or  rents.  There  are, 
therefore,  three  rents  :  rente  foncih'e,  the  result  of  the  fixed 
labor  applied  to  land  or  industry ;  rente  industrielley  the  re- 
sult of  the  travail  appris  in  industry  ;  and  rente  mobili^re, 
the  result  of  the  travail  supcrjln  in  commerce.  The  aim  of 
every  man  is  to  turn  his  labor  into  that  particular  kind  of 
occupation  which  will  give  him  the  greatest  rent  or  surplus. 
From  this  mutual  struggle  results  the  system  of  "equilib- 
rium of  advantages,"  the  laws  of  which  are  the  explana- 
tion of  all  economic  phenomena.^  The  balance  or  equilib- 
rium of  these  three  rents  is  the  foundation  of  the  law  of 
incidence. 

other  places  of  taxes  being  "absorbed"  by  improvements.  See  op.  cit.,  pp.  179 
and  190. 

1  Hamilton  is  also  noteworthy  first  in  that  he  distinguishes  between  "  political," 
"commercial,"  and  "revenue"  taxes  (/.^.social,  prohibitive, and  fiscal  taxes), and 
secondly  in  that  he  emphasizes  the  possibility  of  taxes  acting  as  a  spur  to  industry. 
Cf.  op.  cit,,  pp.  76  and  163. 

2  Principes  d^ Aconomie  Politique.  Ouvrage  couronne  par  VInstitut  NationaL 
Par  N.  F.  Canard.     Paris,  an  X  (1801). 

•  "  L'equilibre  des  rentes." — Ibid.,  pp.  10-12. 


i6o  Shifting  and  Incidence  of  Taxation 

All  taxes,  he  continues,  must  be  paid  from  one  of  these 
three  rents,  since  a  tax  can  never  remain  on  the  travail  natii- 
rel  which  is  necessary  to  existence.  All  taxes,  again,  are 
shifted  because  they  disturb  the  equilibrium  between  the 
rents.  Hence  it  makes  no  difference  how  a  tax  is  imposed, 
whether  on  rent  or  on  consumption.  The  incidence  will  al- 
ways be  the  same ;  for  a  tax  always  diminishes  the  desire  or 
"  determination  "  of  the  buyer  and  seller,  and  no  sale  will  take 
place  until  these  desires  are  equalized  by  each  party  assum- 
ing one-half  of  the  tax.  This  is  the  "equilibrium  of  the 
determination  "  to  exchange.  The  first  step  in  the  shifting 
of  taxes  is  then  like  this  :  ^  — 


Total  tax  =  T. 


.  ^  T  is  share  of  first  seller. 


'   \  .  ^  T  is  share  of  second  seller. 

Share  of  first  buyer  is  ^^  T  ^  ^  j^  ^j^^^^  ^^  ^^^^^  ^^lj^^_ 


Share  of  second  buyer  is  .     4  T  I  ^  j^  ^  is  share  of  fourth  seller. 

1. 


Share  of  third  buyer  is      .     .     .    '•  |  T  ' 


Share  of  fourth  buyer  is    ...     .  iV  T,  etc. 

But  this  is,  of  course,  only  the  first  step.  The  first  seller 
will  immediately  see  that  he  is  bearing  one-half  of  the  tax, 
while  only  one-quarter  rests  on  the  buyer.  He  will  perceive 
that  the  buyer's  "determination"  to  exchange  is  stronger 
than  his,  and  will,  therefore,  refuse  to  sell.  But  if  the  buyer 
assumes  an  additional  share  of  the  tax,  as  he  well  can,  he 
will  for  the  same  reasons  shift  a  part  of  the  tax  to  the  next 
seller,  and  so  on.  There  will  be  no  equilibrium  until  each 
bears  an  equal  share. 

To  understand  how  the  burden  of  the  tax  is  distributed  be- 
tween buyer  and  seller.  Canard  likens  the  system  of  circula- 
tion of  goods  to  a  series  of  communicating  tubes.  No  matter 
how  much  water  we  pour  in  or  out  of  any  one  tube,  every 
one  of  the  other  tubes  will  gain  or  lose  until  the  level  is 
again  reached  in  all.  Just  as  the  water  will  seek  its  level 
by  distributing  itself  proportionally  to  the  diameter  of  each 
tube,  so  every  tax  will  be  distributed  equally  between  buyers 

^  Principes  d^Economie  Politique,  p.  158. 


The  Equal-diffusion    Theory  i6i 

and  sellers  according  to  their  capacity  to  labor.^  Hence  it  is 
useless  for  economists  to  devise  schemes  for  taxing  forms  of 
business  which  seem  not  to  be  hit  by  any  existing  tax.  It  is, 
moreover,  utterly  futile  for  the  banker  or  merchant  to  hide 
his  books ;  for  the  taxation  of  any  one  branch  of  industry  is 
like  the  operation  of  cupping.  The  vein  from  which  the 
surgeon  has  taken  the  blood  is  not  more  bloodless  after  the 
operation  than  any  of  the  other  veins  of  the  body.  So  it  is 
with  the  profits  of  any  branch  of  industry  which  are  dimin- 
ished by  a  tax ;  the  profits  of  all  other  branches  flow  in  at 
once,  until  the  equilibrium  is  restored.^  It  may  be  said,  in 
fact,  that  the  burden  of  the  tax  finally  disappears,  and  that 
the  tax  is  ultimately  borne  by  no  one  at  all.^ 

Canard,  however,  confesses  that  it  takes  some  time  for  this 
equilibrium  to  be  realized.     There  will,  he  admits,  be  many 

^  "Pour  concevoir  comment  I'impot  se  repartit  sur  tous  les  acheteurs-vendeurs, 
imaginons  une  suite  de  tubes  se  communiquant  entr'eux;  si  dans  I'un  d'eux  on 
verse  un  liquide  quelconque,  il  s'ecoulera  successivement  dans  tous  les  tubes,  et 
I'ecoulement  cessera  lorsqu'il  y  sera  de  niveau.  Alors  le  liquide  sera  reparti  dans 
tous  les  tubes  proportionellement  Si  leur  diam^tre,  de  meme  que  I'impot  est  reparti 
sur  tous  les  acheteurs-vendeurs,  proportionellement  i  la  capacite  de  leur  travail." — 
Ibid,,  p.  i6i.  "Les  lois  d'equilibre,  dans  le  systeme  general  de  la  circulation, 
sont  les  mSmes  que  les  lois  de  I'equilibre  des  fluides."  —  Ibid.,  p.  233. 

2  "  C'est  done  bien  vainement  que  les  economistes  s'epuisent  en  moyens  pour 
chercher  \  atteindre  par  I'impot  les  branches  qui  lui  paraissent  inaccessibles : 
I'impot  c|ue  I'on  per^oit  sur  une  branche  d'industrie  ressemble  Si  la  saignee  que 
le  chirurgien  fait  au  bras;  la  veine  qu'il  a  piquee  n'est  pas  plus  appauvrie  du  sang 
apres  I'operation,  que  toutes  les  autres  parties  du  corps.  II  en  est  de  meme  du 
gain  {[ue  I'impot  soutire  d'une  branche;  le  gain  des  autres  branches  vient  toul-i- 
coup  y  aflluer  pour  retablier  I't^iuilibre."  —  Ibid.,  pp.  168,  169. 

*  "On  peut  dire,  \  la  rigueur,  que  la  charge  de  I'impot  tinit  par  Stre  tout-h-fait 
nulla,  et  n'est  supportee  par  aucun  individu."  —  Ibid.,  p.  178.  In  another  pas- 
sage Canard  pictures  the  process  as  follows :  "  Ainsi,  voici  la  marche  que  suit  la 
charge  de  I'impot:  i°  elle  s'ecoule  d'abord  de  celui  qui  le  paie  le  premier  sur 
tous  les  autres  acheteurs-vendeurs  et  consommateurs  de  la  mSme  branche;  2"  de- 
li elle  se  repand  de  proche  en  proche  sur  toutes  les  autres  branches,  par  la  nou- 
velle  concurrence  qu'apportent  ceux  qui  quittent  les  branches  imijosees,  pour 
s'attacher  \  celles  qui  ne  le  sont  pas;  3°  cnlin,  cet  exces  de  concurrence  va  se 
perdre  dans  la  branche  immense  de  Teffort  politicjue  alimentee  par  I'impCt,  et 
dont  la  consommation  dedommage  les  autres  branches  de  la  diminution  do  la 
consommation  superflue  (|ui  en  resulte.  Alors  la  charge  de  I'impot  est  entiire- 
ment  de  niveau,  alors  elle  n'est  plus  sentie."  —  Ibid.,  p.  180. 


1 62  Shifting  and  Incidence  of  Taxation 

contests  between  buyers  and  sellers  and  many  difficulties  in 
the  way.  These  difficulties  he  calls  the  "  friction  of  taxa- 
tion." ^  During  this  period  of  returning  equilibrium,  even  the 
"natural  labor,"  or  the  wages  of  the  ordinary  laborer,  may  be 
affected  by  the  tax.  Moreover,  this  period  of  friction  pro- 
duces serious  fluctuations,  which  throw  all  business  into 
confusion  until  the  equilibrium  is  again  reached.  It  is  not 
so  much  the  tax  which  causes  the  trouble,  as  the  derange- 
ment of  the  equilibrium.  Hence,  concludes  Canard,  we  may 
advance  this  great  truth  :  "  Every  old  tax  is  good,  every  new 
tax  is  bad."^  A  government  which  does  not  possess  a  fixed, 
invariable  system  of  taxation  is  like  the  planter  who  is  con- 
tinually changing  his  methods,  but  whose  land,  in  the  mean- 
time, produces  nothing,  until  the  owner  himself  is  ruined.^ 
Every  tax  becomes  good,  provided  it  lasts  long  enough.* 
Curiously  enough,  Canard's  practical  solution  of  the  problem 
is  found  in  the  proposal  to  replace  all  existing  taxes  by  a  tax 
on  salt. 

The  theory  of  Canard  was  accepted  by  several  writers, 
notably  by  Courcelle-Seneuil  and  Cherbuliez  in  France,  and 
by  Prittwitz  in  Germany.  Courcelle-Seneuil  tells  us  that  old 
taxes  act  exactly  like  climatic  or  agricultural  disadvantages. 
Society  is  poorer,  says  he,  than  it  would  be  if  these  dis- 
advantages did  not  exist,  but  the  disadvantages  are  spread 
over  the  whole  community.^     Cherbuliez  expresses  the  same 

1  "  Cette  difficulte,  c'est  ce  que  j'appellerai  le  frottement  de  I'impot."  —  Prin- 
cipes  d'Aconomie  Politique,  p.  l8l. 

2  "  On  voit  done  que  ce  n'est  pas  I'impot  par  lui  m^me  qui  fait  le  mal,  mais 
seulement  le  derangement  de  I'equilibre  qu'il  cause.  Done  on  peut  avaneer  cette 
grande  verite,  que  tout  vieil  impbt  est  bon,  et  tout  nouvel  impot  est  mauvais."  — 
Jbid.,  p.  197. 

^  "  Un  gouvernement  qui  n'a  pas  une  maniere  fixe  et  invariable  d'impositions, 
ressemble  ^  un  proprietaire  qui,  apres  avoir  fait  une  plantation,  s'en  degoflte,  la 
change  pour  une  autre,  et  celle-ci  pour  une  autre  encore;  pendant  ce  temps 
la  terre  ne  produit  rien,  et  le  proprietaire  se  ruine."  —  Ibid.,  p.  198. 

*  "  Tout  impot  ne  devient  bon  que  par  sa  vetuste."  —  Ibid.,  p.  233.    C/.  p.  202. 

^  "  Lorsque  les  impots  ont  re^u  la  sanction  du  temps,  ils  ne  touchent  plus  a  la 
propriete  d'aucun  individu  en  particulier,  parceque  chacun  a  arrange  sa  vie  en 
vue  dc  son  existence.     Ils  agissent  alors  exactement  comme  les  inconvenients  du 


The  Equal-diffusion    Theory  163 

idea,  but  in  somewhat  modified  form,  in  saying  that  stability 
is  the  best  quality  of  a  tax  system,  as  mobility  is  the  worst. 
All  taxes,  he  argues,  no  matter  how  bad  at  first,  gradually 
become  good.^ 

The  theory  reached  its  final  stage  in  the  German  writer 
Prittwitz,  who  maintained  that  the  only  way  to  secure  a  just 
and  equitable  distribution  of  taxes  was  through  a  permanent, 
immutable  system,  and  that  this  would  be  equally  true,  even 
though  the  system  were  at  its  inception  the  most  absurd  and 
burdensome  one  imaginable.^  It  is  for  this  reason  that  the 
theory  may  be  called  the  "  optimistic  "  theory. 

The  writer  who  may  be  said  to  share  with  Canard  the 
doubtful  honor  of  founding  the  optimistic  theory  is  Thiers, 
He  wrote  quite  independently  of  Canard,  and  is  of  especial 
importance  as  being  the  popularizer^  of  the  term  "diffusion  " 
of  taxes  —  a  term  he  borrows  from  the  science  of  optics. 
He  compares  the  shifting  of  taxes  to  the  diffusion  of  the  rays 
of  light,  and  lays  down  his  principle  in  the  following  words : 
"  Taxes  are  shifted  indefinitely,  and  tend  to  become  a  part  of 
the  prices  of  commodities,  to  such  an  extent  that  every  one 
bears  his  share,  not  in  proportion  to  what  he  pays  to  the 
state,  but  in  proportion  to  what  he  consumes."*     The  argu- 

climat  et  du  sol  :  la  societe  en  general  est  moins  riche  que  si  ces  inconvenients 
n'existaient  pas  ;  mais  cette  diminution  de  richesse  se  trouve  repartie  de  telle 
fa9on  que  toutes  les  forces  mecaniques  sont  dans  leur  equilihre  naturel."  —  Traite 
iheorique  et  pratique  d'' Economic  Politique.  Par  J.  C.  Courcelle-Seneuil.  Paris, 
1857.     2d  ed.,  1867,  i,  p.  462. 

*  "  Tout  systeme  d'impots,  quelque  vicieux  qu'il  puisse  etre  en  theorie,  au  point 
de  vue  de  la  repartition,  va  s'ameliorant  en  pratique  avec  les  annees  a  mesure  que 
les  effets  immediats  du  prelevement  sont  amortis  et  successivement  effaces  par  Tac- 
tion toujours  graduelle,  souvent  tres  lente,  mais  invariable  et  certaine,  des  lois  qui 
gouvernent  la  vie  economique  des  societes."  —  Pri-cis  de  la  Scietice  Economique  et 
de  ses  principales  Applications.     Par  A.  E.  Cherbuliez.     Paris,  1862,  ii,  p.  457. 

^ "  Denkbar  abenteuerlichste  und  driickendste "  are  the  words.  Cf.  Die 
Kunst  reich  zu  werden,  oder  gemeinfaszliche  Darstellung  der  Volkswirtkschaft. 
Von  M.  V.  Prittwitz.  Mannheim,  1840,  pp.  515-522  ;  and  the  same  writer's  'Phe- 
orie  der  Steuern  und  Z'dlle,  Stuttgart,  1842,  pp.  107- 1 16. 

''Not  the  inventor,  as  was  stated  in  the  earlier  editions.  As  we  now  know, 
Hamilton  was  the  inventor  of  the  term. 

*  L'impot  se  repartit  a  I'infini,  et  tend  a  se  confondre  avec  le  prix  des  choses, 


164  Shifting  and  Incidence  of  Taxation 

ments  with  which  Thiers  supports  this  thesis  are  as  follows : 
The  manufacturer  who  pays  a  tax,  whether  direct  or  indirect, 
adds  the  tax  to  the  price  of  the  commodity ;  for,  consciously 
or  not,  he  necessarily  fixes  the  price  so  as  to  recompense  him 
for  all  his  outlays,  plus  a  certain  profit.  Otherwise  he  would 
quit  the  business.  The  tax,  then,  is  simply  a  part  of  the  cost 
of  production.  This  is  true  not  only  of  the  manufacturer, 
but  of  the  farmer.  If  he  is  to  remain  in  the  occupation  of 
agriculture,  all  his  outlays  must  be  made  good.  So,  again, 
the  laborer  is  in  precisely  the  same  situation ;  for  unless  his 
wages  increase  by  the  amount  of  the  tax,  he  must  change  his 
occupation  or  die  of  hunger.  Thus  all  taxes  are  indefinitely 
shifted. 

When  we  remember  that  Thiers'  whole  work  was  written 
to  prove  the  absolute  rights  of  private  property,  we  need  not 
feel  surprised  at  his  conclusions.  He  tells  us  that,  according 
to  this  most  wise  and  reassuring  law  of  providence,  no  mat- 
ter what  the  government  may  do,  it  is  always  the  rich  who 
pay  most  of  the  taxes,  because  they  consume  the  most.^  To 
the  socialists,  he  says :  Hands  off,  do  you  not  see  that  the 
rich  already  pay  most  of  the  taxes .''  To  the  radicals,  who 
wish  to  restrict  the  province  of  indirect  taxes  because  they 
bear  heavily  on  the  poor,  he  says:  Stop,  that  is  not  true;  the 
rich  already  pay  more  than  their  share. 

The  logical  conclusion  of  what  Thiers  calls  this  "  rigor- 
ously true  "  theory  of  incidence  would  undoubtedly  be  that 
it  makes  no  difference  what  system  of  taxation  is  adopted. 
But,  "God  forbid  that  I  should  maintain  such  a  heresy," ^ 
cries  Thiers,  much  to  our  surprise.     He  demands,  in  the  first 

au  point  que  chacun  en  supporte  sa  part,  non  en  raison  de  ce  qu'il  paye  k  I'Etat, 
mais  en  raison  de  ce  qu'il  consomme."  —  De  la  Propriete.  Par  M.  A.  Thiers. 
Paris,  1848,  p.  381.  Cf.  "  L'impot  se  repercute  \  I'infini,  et  de  repercussions  en 
repercussions  devient  en  definitive  partie  integrante  du  prix  des  choses.  C'est  ce 
qui  j'appelle  la  diffusion  de  l'impot."  —  Ibid.,  p.  382. 

1  "  Par  une  loi  des  plus  sages,  des  plus  rassurantes  de  la  Providence,  de 
quelque  fagon  que  s'y  prennent  les  gouvernements,  le  riche  est  apr^s  tout  le  plus 
soumis  a  l'impot."  —  Ibid.,  p.  389. 

2  "Dieu  me  preserve  de  soutenir  une  pareille  heresie." 


The  Equal-diffusion   Theory  165 

place,  equality  of  taxation,  without  attempting,  however,  to 
show  in  what  this  equality  consists.  Secondly,  he  makes  the 
important  concession  that,  although  the  tax  is  ultimately 
shifted,  it  is,  for  the  time  being,  a  burden  on  the  first  payer. 
But  he  at  once  complacently  ignores  these  concessions  and 
maintains  that,  in  the  long  run,  regardless  of  any  act  of  the 
government,  it  is  always  the  rich  who  pay  the  taxes. 

It  is  to  be  noticed  that  this  rather  shallow  doctrine  of 
Thiers  met  with  almost  no  success  in  France,  where  de 
Broglie  is  almost  the  only  writer  who  has  adopted  it,  in 
speaking  of  the  "  indefinite  repercussion "  of  taxes.^  It 
is  remarkable,  however,  that  it  should  have  found  adherents 
in  other  countries.  The  most  noteworthy  modern  follower 
of  Thiers  is  the  Austrian  professor.  Stein,  who  goes  so  far 
as  to  declare  the  whole  doctrine  of  shifting  to  be  the  result 
of  a  "  marvellous  confusion  of  thought."  According  to 
Stein,  every  tax  is  shifted  by  everybody  on  everybody, 
since  everybody  merely  advances  the  tax  for  somebody  else 
who  uses  his  productions.  From  this  theory  logically  fol- 
lows that  there  is  no  need  of  a  science  of  taxation.  In  place 
of  the  "confused  doctrine"  of  the  shifting  of  taxes.  Stein 
propounded  the  "simple  idea  of  the  production  of  taxes,"  the 
idea  that  "  the  total  amount  of  all  taxes  must  be  really  pro- 
duced every  year  as  the  surplus  of  production."^ 

Although  this  conception  may  be  very  "simple"  to  Stein, 
it  must  be  confessed  that  even  all  subsequent  German  writers 

^  "Tout  impot  tombe,  en  derniere  analyse,  sur  le  consommateur;  tout  impot 
entre,  commc  element  integrant,  dans  le  prix  des  choses  consommahles."  —  Le 
Libre  ^change  et  P Impot.  Etudes  d' Economie  Politique,  Par  le  Due  de  Broglie. 
New  ed.  Paris,  1885,  p.  48.  The  passage  originally  appeared  in  his  monograph, 
Les  Imp&ts  et  les  Emprunts,  published  in  1849. 

'^  Lehrbuch  der  Finamwissenscha/t.  Von  Dr.  Lorenz  von  Stein.  4th  ed. 
Leipzig,  1878,  i,  pp.  493-497:  "Die  Lehre  von  der  Uberwalzung  der  Steuern 
ist  eine  der  wunderlichsten  Begriffsverwirrungen,  die  es  je  in  der  Wisscnschaft 
gegeben  hat.  .  .  .  Das  grosse  Resultat  ist  das  jede  Steuer  von  jedem  auf  jeden 
iiberwalzt  wird.  .  .  .  An  die  Stelle  der  unklaren  Ueberwalzung  der  Steuern 
tritt  der  klare  Be^Kder  Production  derselben.  .  .  .  Die  Gesammtsumme  aller 
Steuern  muss  all^^Hth  als  Mehrwerth  der  Production  von  dem  Volke  wirklich 
producirt  warden.  .  .  .      Das   ist  der  einfache  BegrifT  der  Steuerproduction.' 


1 66  Shifting  and  Incidence  of  Taxation 

have  declared  themselves  unable  to  understand  what  it  means. 
We  may,  therefore,  be  excused  from  attempting  to  unravel 
the  mystery. 

In  England,  we  find  during  the  nineteenth  century  com- 
paratively few  allusions  to  the  theory.  Martin  summed  up 
the  doctrine  in  the  following  words :  "  The  public  are  the 
persons  on  whom  the  taxes  fall,  no  matter  how  they  may  be 
artfully  diverged  in  their  course."  ^  A  few  years  later  an 
anonymous  writer  devoted  a  volume  to  an  attempt  to  prove 
that  all  taxes  whatsoever  finally  fall  upon  the  consumer.^ 
This  writer  was  evidently  Gibbon,  for  in  a  subsequent  work 
he  treats  the  subject  in  much  the  same  way,  and  states  the 
equal-diffusion  theory  in  almost  the  same  words  by  saying 
that  "all  taxes,  direct  or  indirect,  paid  by  the  producers  or 
importers  of  commodities,  and  by  the  dealers  therein,  — 
ultimately  fall  upon,  and  are  paid  by,  the  consumers,  by 
whomsoever  such  taxes  may  have  been  paid  to  the  col- 
lectors thereof,  or  into  the  public  chest." ^  Gibbon  applied 
this  rule  to  practically  all  taxes,  for,  according  to  him, 
"taxes  on  land  are  taxes  on  the  produce  of  the  land,  and, 

The  most  recent  attempts  to  understand,  and  at  the  same  time  to  combat,  Stein 
are  found  in  the  two  Dutch  works:  Cort  van  der  Linden,  Leerboek  der  Financien, 
1887,  §  8l,  pp.  156-162;  and  Pierson,  Leerboek  der  Staathuishoudkunde,  1890, 
ii,  pp.  448-455;    or  Principles  of  Econo7nics  (tr.  Wotzel),  ii  (1912),  pp.  451-454. 

1  Taxation  of  the  British  Empire.  By  R.  Montgomery  Martin.  London, 
1833,  p.  245. 

^  "  All  taxes,  direct  and  indirect,  paid  by  owners  or  occupiers  of  land ;  and  all 
taxes  paid  by  the  dealers  in  the  productions  of  land,  on  their  way  from  the 
producer  to  the  consumer  —  and  all  taxes  whatsoever,  paid  by  producers  within 
the  United  Kingdom,  and  by  importers  of  all  commodities  for  home  consumption, 
and  by  the  dealers  in  all  such  commodities,  on  their  way  from  such  producer  or 
importer  to  the  consumer —  as  well  as  all  taxes  of  Customs  or  of  Excise  imposed 
on  such  productions  or  commodities,  by  their  measure  or  weight,  —  ultimately  fall 
upon  and  are  paid  by  the  consumers  of  those  productions  or  commodities,  —  by 
whomsoever  such  taxes  may  have  been  paid  to  the  collectors  thereof,  or  into  the 
public  chests."  —  A  Familiar  Treatise  on  Taxation,  Free  Trade,  etc.,  compris- 
ing Facts  usually  unnoticed  or  unconsidered  in  Theories  of  those  Subjects.  London, 
1846,  p.  21.      Cf.  p.  46. 

8  Taxation  :  its  Nature  and  Properties,  with  Remarks  jj^^e  Incidence  and 
the  Expediency  of  the  Repeal  of  the  Income  Tax.  By  Al^^ier  Gibbon,  Esq. 
London,  185 1,  p.  18. 


The  Equal-diffusion    Theory  16"] 

like  taxes  on  profits  or  income  taxes,  fall  in  the  end  on  the 
consumers."  ^ 

In  America,  the  few  writers  of  prominence  on  the  sub- 
ject of  taxation  were,  until  recently,  almost  all  followers  of 
Thiers.  America  may,  in  fact,  claim  the  honor  of  being  the 
only  country  in  the  world  where  the  doctrine  is  still  upheld. 
The  chief  representative  of  this  easy-going,  complacent  doc- 
trine is  David  A.  Wells.  "  Taxes  equate  and  diffuse  them- 
selves," says  he,  "and  if  levied  with  certainty  and  uniformity 
they  will,  by  a  diffusion  and  repercussion,  reach  and  burden 
all  property  with  unerring  certainty  and  equality.  All  taxa- 
tion ultimately  and  necessarily  falls  on  consumption."'-^  In  a 
later  and  more  elaborate  treatment  of  the  subject"'^  Wells 
affords  a  clearer  picture  of  what  he  really  means.  In  the 
first  place,  he  qualifies  his  earlier  statement  by  restricting  the 
law  to  "taxes  uniformly  levied  on  all  the  subjects  of  taxa- 
tion." *  In  the  second  place,  he  restricts  the  law,  in  its  general 
formulation  at  least,  to  taxes  on  commodities  or  "things."^ 
In  regard  to  the  first  qualification.  Wells  really  abandons  the 
entire  position.     For  he  tells  us  that  if  taxation  is  unequal, 

1  Ibid.,  pp.  19,  26,  33. 

"^  Article  "  Taxation  "  in  Lalor's  Cyclopadia  of  Political  Science,  iii,  p.  88.  The 
editor  of  this  cyclopaedia  makes  the  remarkable  statement :  "  Mr.  Wells'  views  are 
in  harmony  with  those  of  Adam  Smith,  Ricardo,  James  Mill,  Thiers,  McCulloch 
and  Say."  A  most  remarkable  jumble  !  —  Cf.  another  statement  of  Mr.  Wells' 
theory  in  the  Second  Report  of  the  Ne^v  York  Tax  Commission,  1872,  p.  47,  where 
he  quotes  Thiers  approvingly. 

"  The  Theory  and  Practice  of  Taxation.  By  David  Ames  Wells,  New  York, 
1900. 

*  "  Taxes  uniformly  levied  on  all  the  subjects  of  taxation  and  which  are  not  so 
excessive  as  to  become  a  prohibition  on  the  use  of  the  thing  taxed,  become  there- 
fore a  part  of  the  cost  of  all  j)roduction,  distribution,  and  consumption,  and  diffuse 
and  equate  themselves  by  natural  laws  in  the  same  manner  and  in  the  same  minute 
degree  as  all  other  elements  that  constitute  the  expenses  of  production."  —  Op.  cit., 
p.  584. 

^"  Taxes  levied  uniformly  on  things  of  the  same  class  by  the  laws  of  competi- 
tion, supply  and  demand,  and  the  all-pervading  mediums  of  labour,  will  be  dis- 
tributed, percussg^  and  repercussed  to  a  remote  degree  until  they  linally  fall  upon 
every  person  in^^  proportion  his  consumption  bears  to  the  aggregate  consump- 
tion of  the  taxed  community."  —  Ibid. 


1 68  Shifting  afid  Incidence  of  Taxation 

the  result  will  not  follow.  "  It  is  not  contended  that  unequal 
taxation  on  competitors  of  the  same  class,  persons,  or  things 
diffuses  itself,  whether  such  inequality  be  the  result  of  inten- 
tion or  of  defective  laws,  and  their  more  defective  administra- 
tion." ^  As  exact  equality  is,  however,  an  ideal  impossible  of 
attainment,  it  is  difficult  to  see  how  Wells'  law  is  applicable  to 
the  facts  of  actual  life.^  In  regard  to  the  second  qualification, 
all  of  Wells'  examples  are  taken  from  taxes  on  commodities 
or  on  classes  of  property,  with  two  exceptions  —  special 
profits  and  incomes.  He  jauntily  waves  aside  special  profits 
by  the  statement  that  they  are  "exceedingly  ephemeral,"  and 
he  seeks  to  overcome  the  difficulty  as  to  incomes  by  a  very 
naff  answer  in  which  he  confuses  diffusion  with  capitalization. 
"  If  it  be  asked,  'Will  an  income  tax  on  a  person  retired  from 
business  be  diffused  ? '  the  answer,  beyond  question,  must  be 
in  the  affirmative,  if  the  tax  is  uniform  on  all  persons  and  on 
all  amounts,  and  is  absolutely  collected  in  minute  sums.^ 
Would  any  one  pay  the  same  price  for  a  railroad  bond  which 
is  subject  to  an  income  tax  as  he  would  pay  for  it  if  it  were 
free  from  tax  .-^  "  *  Of  taxes  on  monopolies,  inheritances,  and 
the  like  we  hear  nothing  at  all. 

Wells  protests  against  the  inference  that  by  "  diffusion  of 
taxes"  he  means  that  "every  tax  tends  to  distribute  itself 
equitably    over   the  whole    surface   of    society."^     With   all 

^  The  Theory  and  Practice  of  Taxation,  p.  59. 

2  In  calling  attention  to  the  undoubted  fact  that  taxes  sometimes  actually  do 
remain  on  the  person  who  immediately  pays  them,  Wells  thinks  that  the  observer 
"  may  not  unfairly  be  compared  to  physicists  who,  constantly  working  with 
imperfect  instruments,  and  constantly  obtaining  in  consequence  defective  results, 
come  at  last  to  regard  their  errors  as  in  the  nature  of  established  truths."  Op.  cit., 
p.  598.  I  should  on  the  contrary  suggest  that  Wells  resembles  the  physicist  who, 
after  elaborating  the  laws  which  are  true  in  vacuo,  applies  them  to  a  world  in  which 
there  is  no  vacuum.  The  analogy  is,  however,  imperfect  because  it  assumes  that 
the  law  which  works  in  vacuo  has  been  correctly  formulated. 

3  Would  Mr.  Wells  claim  that  such  a  tax  has  ever  existed  ?       *  Ibid.,  p.  586. 

5  "  Such  an  implication  as  is  sometimes  used  in  popular  and  superficial  discus- 
sion would  be  even  more  fallacious  than  an  assumption  that^tery  expenditure 
made  by  an  individual  distributes  itself  in  such  a  way  that  it  ilRmes  equally  an 
expenditure  by  every  other  individual."  —  Ibid.,  p.  597. 


The  Equal-diffusion   Theory  169 

deference,  however,  it  must  be  confessed  that  the  distinction 
drawn  by  Wells  is  one  between  tweedledum  and  tweedledee. 
We  are  in  entire  sympathy  with  his  attempt  to  show  that  in 
order  to  reach  equality  in  taxation  it  is  not  necessary  to  tax 
every  item  of  property  through  the  general  property  tax  ;  but 
it  is  a  far  cry  from  this  contention  to  the  statement  that 
"  taxes  if  levied  with  certainty  and  uniformity  upon  tangible 
property  and  fixed  signs  of  property  will,  by  a  diffusion  and 
repercussion,  reach  and  burden  all  visible  property,  and  also 
all  the  so-called  'invisible  and  intangible'  property  with 
unerring  certainty  and  equality."^  With  what  degree  of 
"unerring  certainty,"  we  may  venture  to  ask,  will  a  tax  levied 
"with  certainty  and  uniformity"  on  the  real  estate  of  all 
railroads  reach  the  subsequent  purchaser  of  a  railroad  bond  ? 

Wells  is  well  nigh  the  only  important  American  representa- 
tive of  this  doctrine.  The  same  theory,  however,  has  been 
advanced,  although  in  a  somewhat  less  rigid  form,  by  Isaac 
Sherman  in  the  statement  that  "all  proportional  contributions 
to  the  state  from  direct  competitors  are  diffused  upon  things 
and  persons  by  a  uniformity  as  manifest  as  is  the  pressure  of 
water  which  is  known  to  be  uniform  in  all  directions."  ^  Even 
Judge  Cooley  is  not  entirely  free  from  a  share  in  this  opinion.^ 

President  Walker  was  the  first  American  economist  to 
question  the  truth  of  the  optimistic  theory.^  He  seems,  how- 
ever, to  overlook  the  fact  that  this  is  only  one  among  many 
theories  of  incidence,  and  that  the  problem  of  shifting  cannot 
be  solved  simply  by  a  negation  of  the  equal- diffusion  doc- 
trine. It  may  also  be  mentioned  that  Alexander  Hamilton, 
at  the  end  of  the  eighteenth  century,  made  an  incidental 
allusion   to   the   equal-diffusion    theory,    although    the    term 


^  The  Theory  and  Practice  of  Taxation,  p.  597. 

^  The  Exclusive  Taxation  of  Real  Estate  and  the  Franchises  of  a  Few  Specified 
Moneyed  Corporations.     By  Isaac  Sherman.     New  York,  1874. 

*  A  Treatise  on  the  Law  of  Taxation.  By  Thomas  M.  Cooley.  Chicago,  i88i, 
2d  ed.,  1886,  p.  ^ 

^Political  E^noniy.  By  Francis  A.  Walker.  3d  ed.  New  York,  1888, 
§§  606-610. 


1 70  Shifting  and  Incidence  of  Taxation 

was,  of  course,  not  employed  by  him.  It  is  interesting  to 
observe  that  in  his  treatment  of  taxes  on  consumption  he 
uses  almost  the  same  metaphor  which  later  on  became  com- 
mon. "  Imports,  excises,  and  in  general  all  duties  upon 
articles  of  consumption  may  be  compared  to  a  fluid,  which 
will  in  time  find  its  level  with  the  means  of  paying  them.  .  .  . 
In  the  course  of  time  and  things,  an  equilibrium,  so  far  as  is 
attainable  in  so  complicated  a  subject,  will  be  established 
everywhere."  ^ 

Hamilton,  however,  was  too  great  a  statesman  to  be  deluded 
by  the  specious  advantages  of  a  system  of  taxation  based  on 
this  theory.  He  was  careful  to  point  out  that  the  important 
thing  is  to  distribute  the  burdens  equitably  at  first,  and  not 
to  rely  upon  the  supposed  automatic  working  of  any  such 
general  principle.^ 

In  recent  years  this  doctrine  has  again  found  a  few  half- 
hearted defenders  in  Great  Britain.  Sir  E.  Hamilton,  for 
instance,  tells  us  that  "  perhaps  there  is  more  truth  than  is 
popularly  supposed  in  the  optimistic  theory  of  general  diffu- 
sion," ^  which  he  sums  up  in  the  first  quotation  from  Wells 
mentioned  above  on  page  167  ;  and  Lord  Avebury  quotes  with 
approval  the  same  sentiment,  although  both  he  and  Sir  E. 


1  The  Federalist,  No.  2i.     Ed.  J.  C.  Hamilton.     Philadelphia,  1877,  p.  182. 

2  "Though  it  may  be  said  that  on  the  principle  of  a  reciprocal  influence  of 
prices,  whereon  the  taxes  are  laid  in  first  instance,  they  will  in  the  end  be  borne 
by  all  classes,  yet  it  is  of  the  greatest  importance  that  no  one  should  sink  under 
the  immediate  pressure.  The  great  art  is  to  distribute  the  public  burthens  well, 
and  not  suffer  them,  either  first  or  last,  to  fall  too  heavily  on  parts  of  the  commu- 
nity, else  distress  and  disorder  must  ensue;  a  shock  given  to  any  part  of  a  political 
machine  vibrates  through  the  whole."  —  The  Continentalist,  No.  6,  1782.  (  Works 
of  Alexander  Hamilton,  edited  by  Henry  Cabot  Lodge,  i,  p.  265.) 

^  In  Memoranda  chiefly  relatitig  to  the  Classification  and  Incidence  of  Imperial 
and  Local  Taxes  of  the  Royal  Comtnission  on  Local  Taxation,  1899,  pp.  51-52, 
Sir  E.  Hamilton's  position  is  not,  as  he  thinks,  supported  by  the  quotation  in  the 
note  from  Leonard  H.  Courtney's  chapter  on  Finance,  contained  in  The  Reign  of 
Queen  Victoria  edited  by  Thos.  Humphry  Ward  in  1887,  i,  332.  When  Mr. 
Courtney  says  that  "  there  is  some  plausibility  in  the  suggesti^  that  in  the  end 
the  burden  reaches  each  back  according  to  its  capacity  to  bear  it,"  he  refers  not  to 
taxes  in  general,  but  to  indirect  taxes  in  the  shape  of  customs  and  excise. 


The  Equal-diffusion   Theory  171 

Hamilton  fail  to  notice  the  qualifications  in  Wells'  later 
formulation.^ 

It  is  indeed  true  that  the  diffusion  theory  marks,  in  some 
respects,  a  decided  step  in  advance,  in  that  it  calls  attention 
to  the  undoubted  fact  that  we  must  go  behind  the  first 
appearances  and  attempt  to  trace  the  effects  of  a  tax  to  its 
ultimate  consequences.  And  if  the  advocates  of  the  doctrine 
were  content  to  limit  their  statement  to  the  possible  conse- 
quences of  some  taxes,  the  doctrine  would  be  not  only  plausi- 
ble, but  defensible.  The  real  weakness  of  the  theory  consists 
in  its  attempting  to  prove  too  much.  The  old  doctrine  was 
that  all  taxes  rest  where  they  are  assessed.  The  diffusion 
theory  did  excellent  service  in  showing  the  fallacy  of  this 
statement ;  but  it  went  to  a  like  extreme  in  claiming  that  no 
taxes  remain  where  they  are  imposed.  The  naif  earlier  doc- 
trine erred  on  the  side  of  inadequate  analysis ;  the  new  doc- 
trine erred  on  the  side  of  undue  generalization.  Some  taxes, 
not  all  taxes,  rest  where  they  are  imposed;  some  taxes,  not 
all  taxes,  are  shifted  and  diffused.  But  the  element  of  truth 
in  the  diffusion  theory  is  worth  preserving,  and  we  shall 
attempt  later  on  to  set  it  in  its  right  proportion.^ 

If  the  general  diffusion  theory  is  hasty,  the  particular  ver- 
sion of  it  which  we  have  termed  the  optimistic  theory  is  com- 
pletely untenable.  It  is,  in  fact,  so  superficial  that  it  scarcely 
deserves  a  refutation.  The  doctrine  has  never  been  accepted 
by  any  writers  of  importance,  except  the  few  already  men- 
tioned, and  the  weakness  in  the  arguments  advanced  to  sup- 
port it  has  been  shown  a  hundred  times.  It  is  needless  to 
repeat  these  arguments  here,  as  our  review  of  the  eclectic 
theories,  as  well  as  the  whole  positive  and  constructive  part 

^  "  Inaugural  Address  on  Local  and  Imperial  Revenues."  By  Lord  Avebury, 
Journal  of  the  Royal  Statistical  Society,  vol.  64  (  1901 ),  p.  566.  Lord  Avebury  in 
discussing  my  treatment  of  this  topic  says  that  "  it  is,  however,  easier  to  denounce  a 
theory  than  to  refute  it,  and  this  Professor  Seligman  does  not  seem  to  me  to 
have  even  attempted."  But  see  as  to  this,  and  as  to  the  objections  of  Professor 
Bastable  (who  is  included  in  the  above  condemnation),  Bastable,  Public 
Finance,  3d  eW.,  1903,  p.  371,  note  3. 

'^  See  the  final  chapter. 


172  Shifting  a7id  Incidejtce  of  Taxation 

of  the  present  monograph,  will  show  the  shallowness  of  the 
doctrine.  Were  the  theory  true,  there  would  be  no  need  for 
any  investigation  like  the  present. 

What  may  be  called  the  pessimistic  theory  is,  like  the 
optimistic  theory,  also  based  on  the  doctrine  of  diffusion  ;  but 
it  draws  entirely  different  conclusions.  Its  chief  apostle  is 
the  great  anarchist,  Proudhon.  According  to  him,  all  taxes 
are,  in  last  resort,  taxes  on  the  consumer.  Try  as  the  legislator 
may,  he  cannot  prevent  this  shifting.  The  whole  distinction 
between  direct  and  indirect  taxes,  he  concludes,  is  useless ; 
and  the  result  of  such  attempt  at  classification  must  always  be 
"fiscal  nonsense."^  Since  the  mass  of  the  consumers  are 
poor,  says  he,  all  taxes  are  unjust,  because  they  inevitably 
press  on  the  poor  more  than  on  the  rich.  This  fact  consti- 
tutes the  inevitable  iniquity  of  taxation  :  ^  taxation  is  necessary, 
and  yet  it  is  necessarily  unjust.  This  is  one  of  Proudhon's 
famous  "  contradictions  economiques."  "  The  problem  of 
taxation  is  hence  insoluble.  The  fault  lies  neither  with  the 
principle  of  proportion,  nor  with  the  revolution,  nor  with  the 
government ;  neither  with  ideas  nor  with  men  ;  the  fault  is  to 
be  found  in  the  institutions,  which  themselves  depend  on  the 
nature  of  things." 

Proudhon's  pessimism  is  as  superficial  as  Thiers'  optimism. 
Each  contents  itself  with  words  instead  of  arguments.  Yet, 
however  widely  they  diverge  in  practical  results,  the  theories 
virtually  agree  in  asserting  that  it  really  makes  no  difference 
what  sort  of  taxes  are  imposed.     In  the  light  of  such  theories 

1  "  En  resume,  de  quelque  maniere  qu'on  s'y  prenne  avec  I'impot,  on  obtient 
zero  de  resultat.  C'est  toujours  la  consommation  qui  le  paye."  ...  "  Voici  qui 
met  le  comble  a  la  deraison  fiscale.  En  derniere  analyse,  I'impot  est  acquitte  par  la 
masse." —  Theorie  de  V Itnp&t.  Par  P.  J.  Proudhon.  Paris,  1861.  In  new  edi- 
tion, CEuvres  Completes,  Paris,  1868,  vol.  xv,  pp.  206,  166. 

'■^ "  L'iniquite  de  I'impot  ne  vient  done  pas  de  lui,  elle  a  son  principe  dans  ces 
transformations  engrenees,  dans  cette  oscillation  universelle,  dans  ces  inegalites 
organiques,  qui  sans  cesse,  par  leur  agitation  incoercible,  rejettent  sur  le  produit, 
et  consequemment  sur  la  masse  des  consommations,  ce  que  I'impot  s'etait  efforce 
de  repartir  entre  les  proprietes,  les  maisons,  les  industries,  les  capilaux,  les  loyers, 
etc."  —  Jbid,,  p.  222. 


The  Equal-diffusion   Theory  173 

as  these,  the  whole  science  of  finance  appears  to  be  a  need- 
less product  of  jugglery  and  mystification. 

A  recent  American  writer,  Albert  S.  Bolles,  may  also  be 
regarded  as  an  advocate  of  the  pessimistic  theory,  although 
he  would  probably  resent  any  statement  that  he  had  been 
influenced  by  Proudhon.  In  fact,  he  bases  his  pessimism  on 
the  uncertainty  of  the  process  of  shifting.  According  to 
Mr.  Bolles,  "  no  uniform  law  or  rule  prevails  or  can  possibly 
be  established  with  respect  to  the  transfer  (of  taxes)."  .  .  . 
"  A  tax  which  is  fairly  assessed  on  all  property  in  the  begin- 
ning proves  a  highly  unjust  tax  in  its  operation.  .  .  .  Some 
are  obliged  to  bear  the  whole  burden,  they  can  shift  no  part 
of  it ;  others  are  more  fortunate  and  shift  a  portion ;  others 
are  engaged  in  such  a  business,  or  happily  are  owners  of 
such  property,  that  they  can  shift  the  whole,  or  nearly  the 
whole  burden."  The  whole  system  thus  results  in  the 
greatest  inequalities.^ 

It  is  true  that  Mr,  Bolles  applies  his  doctrine  only  to  the 
general  property  tax.  But  the  reasoning  is  equally  appli- 
cable to  other  taxes ;  for  in  the  matter  of  incidence  there  is 
very  little  difference,  as  we  shall  see,  between  a  tax  on 
property  and  one  on  profits.  Almost  all  taxes  may  be  con- 
sidered, in  one  sense,  taxes  on  profits.  If  it  were  true  that  a 
uniform  tax  always  results  in  gross  inequalities,  the  outlook 
for  just  taxation  would  indeed  be  poor.  But,  as  will  appear, 
it  is  an  exaggeration  to  say  that  "  uniform  rules  cannot  be 
established."  Pessimism  we  shall  find  to  be  as  untenable  as 
optimism. 

1  Report  of  A.  S.  Bolles  in  Report  of  the  Revenue  Commission  appointed  by 
the  Act  of  the  Legislature  of  Pennsylvania,  May  25,  1889.  Philadelphia,  1890, 
p.  142. 


CHAPTER   IV 
The  Capitalization  or  Amortization  Theory 

The  origin  of  this  theory  is  connected  with  the  discussion 
of  the  land  tax.  To  the  extent  that  a  land  tax  falls  exclu- 
sively on  the  landowner,  it  was  observed  that  the  effect  is  to 
lower  the  value  of  the  land  by  the  capitalized  value  of  the 
tax.  In  other  words,  since  the  value  of  land  is  fixed  by  its 
net  produce,  a  tax  which  operates  to  decrease  this  net  prod- 
uce diminishes  the  value  of  the  land  by  an  amount  equal  to 
the  capitalized  value  of  the  tax.  The  individual  who  pur- 
chases such  land  will  pay  for  it  only  this  diminished  value. 
He  will  therefore  be  free  of  taxes,  since  he  has  discounted 
the  tax  by  paying  a  smaller  price  for  the  land.  The  tax,  in 
short,  becomes  a  perpetual  rent  charge,  allowance  for  which 
is  made  in  any  transfer  of  the  property.  From  this  argument 
the  conclusion  is  drawn  that  a  tax  on  land,  after  its  first 
imposition,  is  borne  by  no  one,  since  it  is  paid  once  and  for 
all,  and  is  then  immediately  shifted  off  in  a  capitalization  of 
the  tax.  It  is  therefore  entirely  immaterial  how  low  or  how 
high  the  rate  is,  provided  it  be  constant.  This  is  known 
as  the  capitalization  or  amortization  theory,  according  as  we 
look  to  the  increase  or  the  diminution  of  the  capital  value. 
Applied  especially  to  land,  it  is  also  known  as  the  rent-charge 
theory,  because  the  taxes  are  assumed  to  cease  to  be  taxes  on 
the  owner,  and  to  become  rent  charges  in  favor  of  the  state. 

The  germ  of  this  doctrine  may  be  found  in  the  work  of 
some  of  the  English  writers  of  the  eighteenth  century.  As 
far  back  as  1733,  a  pamphleteer  of  the  excise  controversy 
made  an  incidental  allusion  to  the  point.  Speaking  of  the 
effect  of  a  land  tax,  he  says :    "  As  for  those  who  are  late 

»74 


The  Capitalization    Theory  175 

Purchasers,  they  have  little  reason  to  complain,  since  they 
came  in  upon  the  Foot  of  the  Tax,  and  have  often  had 
Allowance  made  them  for  it  in  the  Purchase."^  The 
author,  however,  draws  no  conclusions  from  this  principle. 
Another  writer  of  the  same  period  advances  a  similar  argu- 
ment.2  At  a  considerably  later  period,  John  Young  developed 
the  same  point  independently  in  an  interesting  passage 
intended  to  reenforce  his  general  argument  that  the  weight 
of  taxes  is  not  so  burdensome  as  is  generally  believed. 
Young  maintained  that  when  a  man  bought  a  piece  of  land 
subject  to  a  land  tax,  what  he  really  purchased  was  the 
value  of  the  land  less  the  capitalized  value  of  the  tax, 
which  belonged  not  to  him,  but  to  the  government.'^ 

The  writers  of  the  Physiocratic  school  in  France,  espe- 
cially Turgot  and  Baudeau,  also  called  attention  to  this 
phenomenon.*  But  the  theory  was  without  much  influence 
until  after  the  beginning  of  the  nineteenth  century. 

The  earliest  of  the  nineteenth  century  writers  to  discuss 
this  problem,  and  in  some  respects  the  most  interesting,  was 
John  Craig.  Craig,  who  has  hitherto  been  singularly  neglected, 
is  worthy  of  notice  as,  with  the  exception  of  Hamilton,  the 
only  English  writer  to  devote  a  separate  volume  to  questions 
of   taxation.    He    makes    use    of    the    argument    advanced 

^  The  Nature  of  the  Present  Excise,  and  the  Consequences  of  its  Farther 
Extension  examined.  In  a  letter  to  a  Member  of  Parliament.  London,  1733, 
p.  38. 

^  "  As  estates  have  been  sold  subject  to  the  outgoings  of  Land  Tax,  the 
Purchasers  have  had  an  adequate  Compensation  in  the  Prices  they  have  paid 
for  those  Out-goings."  —  A  Letter  from  the  Mayor  of  the  antient  Horough  of 
Guzzle-Down  to  Sir  Francis  Wronghead,  their  R — ve  in  P — t,  in  Ansiuer  to  his 
Letter  of  the  igth  of  Feb.,  jyj2.  London,  1733,  p.  15.  The  same  idea  is  found 
in  Occasional  Letters  upon  Taxation.  By  an  Independent  Man.  London,  1780, 
p.  49. 

^  "  Let  the  land  tax  be  an  instance.  Suppose  it  fixed  at  a  real  two  shillings 
in  the  pound,  and  rendered  permanent.  In  that  case,  when  a  man  buys  an  estate 
he  knows  what  it  must  pay  to  Government;  he  buys  it  with  that  burden  upon  it, 
and  the  price  is  diminished  accordingly.  It  is  plain  that  if  it  is  worth  twenty- 
seven  years'  purchase  with  that  burden,  it  would  be  worth  thirty  without  it." — 
Essays  on  the  Folloiving  Lnteresting  Subjects,  etc.  By  John  Young,  D.D.  4th 
ed.,  Glasgow,  1794,  p.  125.     See  above,  p.  154.  *  See  above,  pp.  136,  137. 


1 76  Shifting  and  Incidence  of  Taxation 

above,  and  tells  us  that  the  tax  is  "  altogether  paid  by  the 
present  proprietors  to  the  entire  exemption  of  future  pur- 
chasers."^ But  he  limits  the  statement  with  an  important 
condition,  to  be  discussed  in  a  moment,  inattention  to  which 
has  led  succeeding  authors  to  somewhat  absurd  results. 

Some  of  the  early  German  writers  on  public  finance,  such 
as  Sartorius,  Hoffmann  and  Murhard,  went  so  far  as  to  de- 
clare that,  because  of  this  capitalization,  a  land  tax  is  no  tax 
at  all.  Since  it  acts  as  a  rent  charge  capitalized  in  the  de- 
creased value  of  the  land,^  they  argue,  a  land  tax  involves  a 
confiscation  of  the  property  of  the  original  owner.  On  the 
other  hand,  since  the  future  possessors  would  otherwise  go 
scot  free,  it  becomes  necessary  to  levy  some  other  kind  of  a 
tax  on  them.^ 

In  France  we  find  the  theory  expressed  in  part  by  J.-B. 
Say,  although  he  does  not  draw  the  same  conclusions.*     The 

^  "  As  the  free  rent  of  land  will  be  diminished  by  the  tax,  the  price  of  each 
estate  will  proportionally  decline.  If  the  nett  rent  be  reduced  by  a  tax  of  4  sh. 
in  the  pound,  from  ;^ioo  to  £%o  a  year,  the  estate  which  was  formerly  worth 
£^T„QfX)  will  no  longer  sell  for  more  than  ^^2,400.  A  proprietor  therefore,  who 
wishes  to  dispose  of  his  land,  will  at  once  be  deprived  of  one-fifth  of  his  property. 
Instead  of  paying  £zo  a  year  during  his  possession,  and  leaving  this  annual  pay- 
ment as  a  burden  on  the  lands,  he  finds  himself  obliged  to  pay  £(xxi  the  value  of 
the  tax  forever,  while  his  successor  is  exempted  from  all  contribution."  —  Elements 
of  Political  Science.     By  John  Craig,  Esq.     Edinburgh,  1814,  vol.  iii,  p.  38. 

2  The  Germans  call  the  rent-charge  theory  "  Die  Reallast-theorie  der  Grund- 
steuer." 

3  "  Alle  and  jede  fixirte  Grundsteuern  miissen  sonach  im  Fortgange  der  Zeit 
und  im  Verkehre  mit  Grundstiicken  die  Natur  der  Steuern  ganzlich  verlieren  und 
sich  in  Staatsrenten  verwandlen."  —  Theorie  und  Politik  der  BeUeuerung.  Von 
Dr.  Karl  Murhard.  Gottingen,  1834,  p.  295.  Cf.  p.  327.  For  the  necessity  of 
laying  new  taxes  on  future  holders  see  ibid.,  p.  366.  Cf.  similar  passages  in  Die 
Lehre  von  den  Steuern  als  Anleitung  zu  grilndlichen  Urtheilen  iiber  das  Steuer- 
wesen.  Vorgetragen  von  J.  G.  Hoffmann.  Berlin,  1840,  p.  no.  See  also  Ueber 
die  gleiche  Besteuerung  des  Konigsreichs  Hanover.  Von  Georg  Friedrich  Sar- 
torius. Gottingen,  1815,  p.  92.  See  also  Theorie  der  Steuern  und  Z'olle. 
Von  Moriz  v.  Prittwitz.     Stuttgart,  1842,  p.  132. 

*  Traiti  d^ Aconomie  Politique  on  simple  Exposition  de  la  Maniere  dont  se 
forment,  se  distribuent  et  se  consomment  les  Richesses.  Par  Jean-Baptiste  Say. 
Paris,  1802,  book  iii,  chap,  x;  8th  ed.,  1876,  p.  565:  "  Le  proprietaire  ne  peut, 
mSme  par  la  vente  de  son  fonds,  se  soustraire  au  fardeau  de  I'impot :  car  le  fonds 
n'est  paye  en  principal  qu'en  proportion  de  ce  que  I'impot  lui  laisse  valoir  en 


The  Capitalization   Theory  177 

doctrine  is  most  clearly  expounded,  however,  in  the  work  of 
Destutt  de  Tracy,  who  makes  the  "  singular  and  important 
observation  "  that  when  a  tax  is  laid  on  land,  a  value  equal  to 
the  capital  of  the  tax  is  at  once  taken  from  the  actual  propri- 
etors, and  that  when  all  have  changed  owners,  it  is  really  no 
longer  paid  by  any  one.  It  is  worthy  of  note  that  Tracy 
applies  his  doctrine,  also,  to  taxes  on  houses  and  on  annui- 
ties.^ Several  decades  later  the  capitalization  theory  was 
most  elaborately  defended  by  Passy,  who  has  often,  but 
erroneously,  been  deemed  the  real  founder  of  the  doctrine. 
Since  his  time  the  doctrine  has  generally  been  known  in 
France  as  the  theory  of  the  immutability  of  the  land  tax 
{T/ieorie  de  la  fixiti  de  Vimpot).  Passy  drew  the  logical  con- 
clusion that  the  rate  of  the  tax  ought  never  to  be  changed. 
To  increase  it  would  be  to  confiscate  the  property;  to  reduce 
it  would  be  to  make  a  free  gift  of  the  capitalized  value  of  the 
tax  to  the  landowner.^  The  theory  has  been  accepted  by 
several  other  French  economists.  Thus,  Gamier  maintains 
that  a  tax  on  land  is  really  an  expropriation  of  the  original 


revenu.  .  .  .  Cest  comme  si  le  gouvernement  prenait  un  cinqui^me  de  la  terre." 
In  a  work  subsequently  published  by  Craig,  Remarks  on  Some  Fundamental 
Doctrines  in  Political  Economy,  Edinburgh,  1 821,  he  calls  attention  to  the  fact 
that  Say  entertained  many  of  his  views  on  taxation,  although  neither  had  seen  the 
work  of  the  other. 

1  Elements  d' Ideologie.  Par  Comte  A.  L.  C.  Destutt  de  Tracy.  Paris,  1804. 
This  was  reprinted  in  1823  under  the  title  of  Traite  d'Aconomie  Politique.  Cf. 
the  American  translation  by  Thomas  Jefferson,  under  the  title  A  Treatise  on 
Political  Economy.  By  the  Count  Destutt  Tracy.  Translated  from  the  unpub- 
lished French  Original.     Georgetown,  D.C.,  1817,  pp.  207-210. 

2  "  Une  remarque  essentielle,  en  ce  qui  concerne  I'impot  territorial,  c'est  qu'il 
finit  par  ne  plus  Stre  constitu6  \  titre  veritablement  onereux  pour  ceux  qui 
I'acquittent.  Cet  effet  resulte  des  transmissions  dont  la  terre  est  I'objet.  .  .  .  On 
ne  peut  elever  le  taux  de  I'impot  sans  rivir  aux  proprietaires  non  seulement  une 
portion  des  revenus  dont  ils  jouissent,  mais  encore  du  capital  mGme  du  nouveau 
tribut  annuel  mis  k  leur  charge.  On  ne  peut,  au  contrairc,  abaisser  ce  taux  sans 
leur  faire  don  d'une  rente  appartenant  a  I'etat,  et  en  m9me  temps  du  capital  de 
cette  mSme  rente."  —  Hippolyte  Passy,  article  "  Impot "  in  Dictionnaire  de 
VJ^conomie  Politique,  Paris,  1852,  p.  902.  Denis,  Ulmp&t,  1889,  161,  errs  in 
ascribing  the  origin  of  the  doctrine  to  Passy.  Pantaleoni,  Teoria  delta  Trasla* 
stone  dei  Tributi,  1882,  p.  173,  seems  to  make  the  same  mistake. 


1 78  Shifting  and  Incidence  of  Taxation 

owner,  to  the  manifest  advantage  of  the  future  proprietors.^ 
We  find  the  same  ideas  in  Wolowski,  Du  Puynode,  Cherbu- 
liez  and  Walras.^  The  real  weakness  of  their  arguments 
has,  moreover,  not  been  perceived  by  subsequent  French 
writers.  Parieu,  who  was  himself  not  very  clear  on  the  gen- 
eral subject,  shows  merely  that  the  doctrine  of  immutability 
necessarily  leads  to  the  English  idea  of  the  redeemable 
rent  charge.^  Even  Leroy-Beaulieu,  although  he  terms  it 
a  "  remarkably  ingenious  theory,  with  all  the  appearance  of 
great  scientific  precision,"  simply  objects  that  it  is  "much  too 
absolute,"  without  going  to  the  pith  of  the  controversy.*  The 
doctrine  itself  probably  attained  its  extreme  form  in  the 
statement  of  the  Austrian  economist.  Stein,  that  this  ques- 
tion is  the  most  important  in  the  whole  domain  of  taxation, 
and  that  the  land  tax  ought  never  to  be  increased.^ 

In  England  the  theory  has  seemed  to  derive  some  support 
from  the  fact  that  the  land  tax  is  indeed  a  redeemable  rent 

1  "  Un  impot  foncier,  quand  on  I'etablit,  est  une  sorte  d'expropriation  du 
propri^taire  pour  une  certaine  partie  de  son  fonds;  mais  I'acheteur  qui  lui  succede 
paye  la  terre  en  consequence  et  ne  subit  plus  I'impot."  —  Les  Elements  des  Finances. 
Par  Joseph  Gamier.  Paris,  1858.  4th  ed.,  1885,  under  title  of  Traite  de  Finances, 
pp.  100,  103. 

2  "  Tout  accroissement  de  I'impot  direct  sur  la  propriete  ne  porte  que  le  nom 
d'imp8t :  il  est  en  realite  une  confiscation  partielle  deguisee  sous  une  apparence 
trompeuse."  —  Wolowski,  in  the  Journal  des  Econotnistes,  1866,  iv,  p.  141.  Cf. 
De  la  Monnaie,  du  Credit,  et  de  V Impbt.  Par  Gustave  du  Puynode.  Paris, 
1853,  ii,  p.  171.  See  also  Precis  de  la  Science  Aconomique,  et  de  ses  Principales 
Applications.  Par  A.-E.  Cherbuliez.  Paris,  1862,  ii,  p.  437.  See  also  Elements 
d'Aconomie  Politique  Pure,  ou  Thcorie  de  la  Richesse  Sociale.  Par  Leon  Walras. 
3d  ed.,  Lausanne,  1896,  pp.  452-454;  and  the  same  author's  earlier  work, 
Theorie  Critique  de  V Impbt,  i86i,  p.  34. 

3  "  Cette  immutabilite  n'est  meme  que  la  timide  premisse  de  sa  rachetabilite." 
—  Traite  des  Impbts  consider es  sous  le  Rapport  Historique,  Aconomique  et 
Politique.     Par  M.  Esquirou  de  Parieu.     Paris,  1862.     2d  ed.,  1866,  i,  p.  273. 

*  Traite  de  la  Science  des  Finances.  Par  Paul  Leroy-Beaulieu.  Paris,  1876. 
5th  ed.,  1892,  i,  p.  319  ;  7th  ed.,  1906,  i,  p.  401. 

^  "  Im  Allgemeinen  ist  nun  kein  Zweifel,  dass  eine  solche  Erhohung  im  ganzen 
Gebiete  der  Besteuerung  die  ernsteste  und  wichtichste  Frage  ist  welche  Uberhaupt 
hier  vorkommen  kann  .  .  .  Das  allgemeine  Princip  daher  muss  sein  .  .  .  dass 
die  Grundsteucr  niemals  erhoht  werden  darf."  —  Lehrbuch  der  Finanzwissenschafi. 
Von  Lorenz  von  Stein.  4th  ed.,  1878,  ii,  p.  55.  In  the  5th  ed,,  1886,  this  passage 
is  omitted.     Cf.  ii,  pp.  103-105. 


The  Capitalization   Theory  179 

charge.  This,  however,  is  owing  to  the  peculiar  circum- 
stances of  the  case.  The  Enghsh  land  tax,  which  was  origi- 
nally a  general  property  tax,  came  to  be  considered  a  fixed 
and  invariable  tax  of  four  shillings  in  the  pound.  In  1798  it 
was  made  perpetual  at  that  rate,  and  the  landowners  were 
given  the  privilege  of  redeeming  it,  that  is,  to  free  the  land 
from  taxation  by  paying  a  certain  lump  sum  by  way  of  com- 
position. In  England,  therefore,  the  land  tax  is  a  redeem- 
able rent  charge  only  because  expressly  made  so  by  statute. 
This  is  what  led  Gregg  to  maintain  that  the  land  tax  was  not 
a  burden  upon  the  land,  because  the  state  had  become  a 
permanent  proprietor  jointly  with  the  owner  of  the  estate. 
It  also  led  Senior  to  express  the  same  views  in  distinguishing 
between  the  incidence  of  a  new  tax  and  that  of  a  fixed  per- 
manent land  tax.^  To  draw  any  general  conclusions  as  to 
the  incidence  of  taxation  in  general  from  these  peculiar 
conditions  would,  however,  be  inadmissible.  The  inference 
that  it  is  always  wrong  to  impose  a  new  tax  or  to  increase  an 
old  tax  on  land  would  be  especially  unjustifiable.  The  truth 
of  the  matter  is  that  the  whole  theory  applies  to  the  land  tax 
only  where  it  is  the  sole  tax  levied.  Furthermore,  it  is  not 
at  all  peculiar  to  the  land  tax. 

The  truth  of  the  latter  part  of  this  statement  was  already 
recognized  in  the  eighteenth  century  by  Young,  who  con- 
tended that  the  argument  as  to  land  taxes  is  equally  applica- 
ble to  "the  house  tax,  the  window  tax,  and  all  others  that 
affect  heritable  property."^  A  step  further,  however,  was 
taken  by  Craig — a  fact  that  seems  to  have  escaped  the 
attention  of  succeeding  economists ;  for  he  expressly  tells 
us  that  his  theory  holds  good  only  in  case  "  a  land  tax  be 
imposed  without  an  equivalent  duty  on  every  other  species 
of  property."  Craig  further  contends  that  exclusive  taxes  in 
general,  like  exclusive  taxes  on  land,  fall  ultimately  on  the 
present   proprietors   of    that   species  of   property    which    is 

^  Select  Committee  of  the  House  of  Lords  on  the  Land  Tax.  London,  1846, 
qu.  5379-5510.     For  the  contemporary  writers  see  infra,  p.  183. 

2  Essays,  etc.     By  John  Young.    1794,  p.  125.    For  full  title,  sec  above,  p.  124. 


l8o  Shifting  and  Incidence  of  Taxation 

taxed. ^  John  Stuart  Mill  entertained  practically  the  same 
opinion,  although  he  did  not  work  out  his  theory,  but  con- 
tented himself  with  asserting  that  a  "  peculiar  tax  on  the 
income  of  any  class,  not  balanced  by  taxes  on  other  classes, 
is  a  violation  of  justice,  and  amounts  to  a  partial  confisca- 
tion." 2 

The  other  English  writers  have  had  little  to  say  about 
the  theory.  Dudley  Baxter,  however,  discusses  the 
"  strange  theory  "  of  the  rent  charge,  as  applied  to  the  land 
tax,  the  poor  rate  and  the  succession,  probate  and  legacy 
duties.  Although  he  professes  to  discover  three  fallacies  in 
the  argument,  none  of  his  objections  really  goes  to  the  root 
of  the  matter.^  Noble,  in  his  chapter  which  deals  solely 
with  the  broad  facts  of  incidence,  mentions  the  rent-charge 
theory  only  in  connection  with  the  land  tax.*  Professor 
Sidgwick,  who  sees  that  the  rent-charge  theory  applies  only 
to  a  special  tax  on  land,  restricts  the  doctrine  to  "any  par- 
ticular kind  of  durable  wealth,  of  which  the  supply  is 
absolutely  limited."  But  even  he  fails  to  recognize  the  real 
scope  of  the  theory.^ 

Of  recent  years  the  point  has  again  been  made  by  Sir 

1  Elements  of  Political  Science,  iii,  pp.  37,  82-S6. 

'Principles  of  Political  Economy,  book  v,  chap,  iii,  §  2.  Cf.,  however,  the 
passage  relating  to  a  special  tax  on  "  realized  property,"  which,  according  to  him, 
"  would  fall  exclusively  on  those  who  happened  to  compose  the  class  when  the 
tax  is  laid  on."  —  Ibid.,  book  v,  chap,  i,  §  3. 

8  The  Taxation  of  the  United  Kingdom.  By  R.  Dudley  Baxter,  M.A. 
London,  1869,  pp.  50-55.  Professor  Heron,  who  distinctly  recognizes  the  capi- 
talization theory  and  states  that  "  a  fixed  tax  on  rent  in  the  process  of  time  would 
absolutely  injure  no  person,"  adds  that  the  "  rule  is  similar  with  regard  to  a  tax 
on  .  .  .  dividends  .  .  .  and  other  funds."  Three  Lectures  on  the  Principles  of 
Taxation  delivered  at  Queen^s  College,  Galway,  in  Hilary  term,  /Sjo.  By 
Denis  Caulfield  Heron.     Dublin,  1850,  p.  72. 

*  National  Finance :  A  Review  of  the  Policy  of  the  last  two  Parliaments, 
and  of  the  Results  of  modern  fiscal  Legislation.  By  John  Noble.  London, 
1875,  p.  282.  Cf  the  same  author's  The  Queen's  Taxes:  An  Inquiry  into 
the  Amount,  Incidence,  and  Economic  Results  of  the  Taxation  of  the  United 
Kingdom.      London,  1870,  p.  146. 

6  'The  Principles  of  Political  Economy.  By  Henry  Sidgwick.  London, 
1883,  p.  569. 


The  Capitalization    Theory  i8i 

R.  Giffen.  In  speaking  of  the  "hereditary-burden  theory,"^ 
Sir  Robert  seems,  however,  to  confuse  the  rent-charge 
theory  with  the  diffusion  theory,  as  when  he  quotes  ap- 
provingly the  "  opinion  that  all  old  taxation  tends  to  become 
equally  diffused  over  the  whole  community,"  and  adds : 
"The  case  of  old  rates,  which  tend  to  become  a  rent-charge 
on  the  property  affected  is,  however,  a  very  special  case." 
The  term  "hereditary  burden"  is  traceable  to  Bagehot  in  a 
passage  which  scarcely  seems  to  justify  the  encomium  of 
Giffen  as  being  "  the  best  exposition  I  know  of."  ^ 

The  only  French  writer,  in  addition  to  Destutt  de  Tracy, 
who  attempted  to  generalize  the  conception  of  the  capitaliza- 
tion of  incidence  was  Cournot.  He  expounded  the  theory 
at  an  early  period,  although  in  other  words.  Above  all, 
Cournot  applied  it  only  to  articles  subject  to  the  law  of 
monopoly ;  ^  he  drew  no  general  conclusions  from  the 
theory. 

It  was  reserved  for  the  German  economists  to  give  to  the 
capitalization  theory  a  more  adequate  presentation.  The 
earliest  writer  to  discuss  it  more  fully  was  Rau,  who  showed 
that  the  theory  was  not  entirely  true  of  the  land  tax.  In  the 
first  place,  says  he,  the  original  owners  or  their  heirs  often 

^  In  Memoranda  chiefly  relating  to  the  Classification  and  Incidence  of 
Imperial  and  Local  Taxes  of  the  Royal  Commission  on  Local  Taxation,  1899, 
p.  99. 

■^  "  For  nearly  three  centuries  the  land  has  been  liable  to  the  relief  of  the 
poor.  The  owners  of  land  have  been  burdened  with  that  duty  to  the 
nation,  and  all  land  has  been  inherited  and  bought  subject  to  it,  and  with 
notice  of  it.  .  .  .  The  owners  of  land  must  therefore  not  complain  of  bearing 
national  burdens.  They  have  always  borne  national  burdens,  and  the  prede- 
cessors under  whom  they  claim  took  the  land  on  the  condition  of  bearing 
them."  —  Walter  Bagehot  in  The  Economist,  April  8,  1871,  p.  407. 

*"0n  peut  m2me  dire  que  cet  impot  [fixed  or  proportional  to  net  profits]  ne  fait 
tort  qu'aux  premiers  possesseurs,  aux  inventeurs  et  en  g^n^ral  a  ceux  qui  jouissaient 
du  fonds  productif  au  moment  de  retablissemcnt  de  I'impot,  et  a  leur  successeurs  i 
titre  gratuit.  Car  les  successeurs  a  litre  onereux  reglent  leur  prix  d'ac(]uisition  sur 
le  produit  net,  defalcation  faite  de  I'impot;  et  si  le  fonds  vient  i  &tre  degreve  entre 
leurs  mains,  c'est  pour  eux  une  veritable  ^pave."  —  Recherches  sur  les  Principes 
Mathcmatiqius  de  la  Theorie  des  Richesses.  Par  Augustin  Cournot.  Paris,  1838, 
P-75- 


1 82  Shifthig  and  Incidence  of  Taxation 

retain  possession,  so  that  there  may  be  no  chance  for  a 
diminution  of  the  capital  value  through  purchase  and  sale. 
Secondly,  the  value  of  land,  he  thinks,  is  fixed  not  alone  by 
the  net  produce,  but  sometimes  by  other  factors,  such  as  a 
change  in  the  demand  or  in  the  rate  of  interest.  In  such  a 
case,  it  cannot  be  said  that  the  new  purchaser  does  not  feel 
the  tax,  because  it  is  difficult  for  him  to  realize  clearly  that  he 
paid  less  for  the  land  on  account  of  the  tax.  So  far  as  the 
theory  is  true,  it  applies  only  to  so  much  of  the  land  tax  as 
exceeds  the  usual  rate  of  taxes  on  other  commodities.  Above 
all,  he  concludes,  the  same  argument  is  applicable  to  every 
tax  levied  on  objects  of  varying  value  capable  of  sale  — 
whether  houses,  stocks,  bonds,  or  other  capital.^ 

Other  writers,  such  as  Helferich  and  Hock,  developed  the 
doctrine,^  and  it  has  recently  been  clearly  expounded  by 
Schaffle.^  The  latter  would  naturally  be  expected  to  en- 
large the  rent-charge  doctrine  into  a  general  theory  of 
capitalization,  because  of  his  doctrine  of  the  universality  of 
the  rent  principle  —  the  doctrine  lately  made  familiar  to 
English  readers,  which  asserts  that  the  theory  of  rent  is  not 
confined  to  land  but  is  applicable  to  all  the  shares  in  distribu- 
tion.* Since  Schaffle  emphasized  this  doctrine,  the  capitaliza- 
tion theory  has  been  accepted  by  Pantaleoni  ^  in  Italy,  and  by 

1  Grunds'dtze  der  Finanzwissenschaft.  Von  Karl  Heinrich  Rau.  Heidelberg, 
1832.     5th  ed.,  1865,  ii,  pp.  22-27. 

2  "  Ueber  die  Einfiihrung  einer  Kapitalsteuer  in  Baden."  Von  Jobann  A.  R. 
von  Helfericb.  In  Tiibinger  Zeitschrift  fur  die  gesamtnte  Siaatswissenschaft, 
1846,  pp.  291  et  seq.  Cf.  Die  offentlicken  Abgaben  und  Schulden.  Von  Dr. 
Carl  Freiherrn  von  Hock.     Stuttgart,  1863,  pp.  11 1  et  seq. 

^  Schaffle,  in  the  book  quoted  in  the  next  note,  and  also  in  Die  Steuern, 
Allgemeiner  Theil.     Leipzig,  1895,  §  212. 

*  Schaffle,  Die  Grunds'dtze  der  Steuerpolitik  und  die  schwebenden  Finanz- 
fragen.  Von  Dr.  Albert  E.  Fr.  Schaffle.  Tubingen,  1880,  pp.  176,  187,  190. 
Schaffle's  general  theory  of  rent  and  profits  was  first  published  in  1867,  in  his 
Nationatokonomische  Theorie  der  ausschliessenden  Absatzverhaltnisse.  The 
theory  was  outlined  as  early  as  1855  by  Mangoldt  in  his  Die  Lehre  vom  Unter- 
nehmergewinn. 

^  Pantaleoni,  Traslazione  dei  Tributi,  p.  179,  chides  Schaffle  for  not  giving 
credit  to  Rau.  But  he  seems  to  forget  that  Craig  preceded  both  Rau  and 
Schaffle. 


The  Capitalization    Theory  183 

Pierson  ^  in  Holland.  But  they  all  fail  to  notice  some  of 
the  qualifications  which  will  be  mentioned  in  the  second 
part  of  this  inquiry.  We  have  been  concerned  here  merely 
with  the  history  of  the  idea.  The  doctrine  itself,  in  its 
modern  form,  constitutes  a  part  of  the  general  theory  of 
incidence  to  be  discussed  hereafter.^ 

"^  Leerboek  der  Staatshuiskoudkunde.  Door  Mr.  N.  G.  Pierson.  Haarlem,  1890, 
ii,  pp.  391-409;  and  Principles  of  Economics,  ii  (1912),  396-414,  "Amortisation 
of  Taxes." 

2  See  below,  part  ii,  chap,  i,  sec.  i,  and  also  p.  200. 

The  consequences  of  capitalization  were  naturally  recognized  and  widely  dis- 
cussed at  the  time  of  the  passage  of  the  British  Land  Tax  Redemption  Act  in 
1 798.  John  Scott,  A  Letter  to  the  Right  Honorable  Chancellor  of  the  Exchequer 
on  his  Proposed  Sale  of  the  Land  Tax,  London,  1 798,  p.  9,  speaks  of  the  "  Land- 
holder buying  the  annihilation  of  his  own  land  tax."  Another  writer  explains 
how  the  purchaser  "  sinks  or  exonerates  bis  tax  " :  Redemption  and  Sale  of  the 
Land  Tax  :  Thoughts  on  that  Lnteresting  Subject  and  Remarks  on  the  Original 
Act  passed  for  that  purpose  in  fune,  17^8  ;  and  on  the  Act  lately  passed,  to  explain 
and  amend  same.  London,  1799,  p.  12.  The  advantages  accruing  to  present 
owners  through  the  10  %  discount  and  the  three-year  delay  in  payment  are  em- 
phasized by  Simeon  Pope,  Interesting  Suggestions  to  Proprietors  and  Trustees  of 
Estates  respecting  the  Land  Tax  Sale  and  Redemption  Act.  London,  1 798.  Cf. 
also  Consequences  of  the  Act  for  the  Redemption  of  the  Land  Tax.  London,  1798. 
J.  Brand,  The  Alteration  of  the  Constitution  of  the  House  of  Commons  and  the 
Inequality  of  the  Land  Tax  considered  conjointly,  London,  1793,  p.  52,  makes 
the  interesting  point  that  "  if  an  additional  tax  on  land  is  devoted  to  the  accumu- 
lation of  a  sinking  fund,  the  selling  price  of  estates  will  be  very  little  if  at  all  de- 
creased; although  their  neat  rents  be  at  first  diminished,  yet,  by  the  operation  of 
such  a  fund,  the  rate  of  interest  must  be  much  reduced;  and  the  year's  purchase 
of  neat  landed  income  will  be  increased  in  the  same  proportion." 


CHAPTER  V 
The  Eclectic  Theory 

The  absolute  theory,  as  well  as  the  equal-diffusion  theory, 
soon  met  with  considerable  opposition.  Most  of  the  oppo- 
nents, however,  have  confined  themselves  to  criticism  and 
to  the  elaboration  of  a  few  special  points.  Their  doctrines 
may  be  summed  up  under  the  head  of  the  eclectic  school. 

One  of  the  first  who  attempted  to  show  the  weakness  of 
both  Canard  and  Ricardo  was  J.-B.  Say.  According  to  him, 
a  tax  on  any  article,  when  followed  by  a  rise  in  price,  falls  on 
the  consumer  only  in  part ;  for  increased  price  means  dimin- 
ished consumption,  and  smaller  demand  means  lower  profits. 
Thus,  even  here,  he  concludes,  the  producer  will  bear  a  part 
of  the  tax.  The  tax  is  like  the  powder  that  affects  both  the 
ball  which  it  propels  and  the  cannon  which  it  causes  to 
recoil.^  Its  effects  are  not  felt  wholly  by  the  consumer  —  it 
never  increases  price  by  the  full  amount  of  the  tax. 

When  the  price  of  the  article  does  not  rise.  Say  continues, 
the  producer  bears  the  whole  tax.  But  everything  depends 
on  whether  the  article  is  a  necessary  or  a  luxury.  If  the  tax 
is  levied  on  raw  materials,  for  example,  it  affects  more  or  less 
the  prices  of  all  other  products.  Direct  taxes  on  producers, 
in  the  same  way,  affect  consumers  very  unequally.  As  the 
doctrine  of  the  transferability  of  capital  is  far  more  true  of 
circulating  than  of  fixed  capital  or  of  land,  there  is  no  such 
thing  as  an  equality  of  profits ;  and  therefore  the  producers 
of  some  commodities  can  shift  the  burden  more  easily  than 

^  "C'est  I'effort  de  la  poudre  qui  agit  ^  la  fois  sur  le  boulet  qu'elle  chasse  et  sur 
le  canon  qu'elle  fait  reculer."  —  Traite  d'Aconomie  Politiqtu.  Par  J.-B.  Say. 
Paris,  1802,  book  Hi,  chap,  x ;   8th  ed.,  1876,  p.  562. 

184 


The  Eclectic    Theory  185 

others.  Moreover,  Canard's  analogy  between  the  imposition 
of  taxes  and  the  cupping  of  the  arm  is  misleading ;  for  the 
wealth  of  society  is  not  a  fluid  seeking  its  own  level.  It  may 
rather  be  likened  to  a  tree,  one  of  whose  branches  may  be 
killed  without  mortally  wounding  the  tree ;  although  the 
richer  the  branch,  the  greater  the  danger  to  the  whole  tree. 
But  an  analogy,  however  good,  is  not  a  proof.  Hence,  con- 
cludes Say,  it  is  rash  to  affirm  that  a  particular  ta.x  falls 
definitely  on  a  certain  class.  Taxes  fall,  varying  with  the 
tax  or  with  the  state  of  the  market,  on  those  who  cannot 
escape  them ;  but  the  methods  of  escape  are  numberless. 
Nothing  is  more  uncertain,  nothing  more  variable,  than  the 
incidence  of  taxation. ^  The  writers  of  the  abstract  school 
reason  on  assumptions  to  which  the  every-day  facts  give 
the  lie. 

On  the  other  hand,  Say  immediately  follows  this  statement 
with  the  assertion  that  a  landowner  can  never  shift  a  tax  to 
the  consumers  —  a  statement  which  seems  to  be  quite  as  ab- 
solute as  those  against  which  he  directs  his  arguments.  The 
land  tax,  he  argues,  will  remain  on  the  landowner,  because 
the  tax  cannot  normally  affect  the  products ;  and,  since  the 
supply  does  not  change,  the  price  cannot.  But  still.  Say  con- 
cludes, it  is  impossible  to  lay  down  any  detailed  principles  of 
incidence.  In  a  machine  so  complicated  as  that  of  society, 
taxes  are  paid  in  many  an  elusive  form.^ 

Another  vigorous  opponent  of  Ricardo  was  Sismondi.  Sis- 
mondi  starts  out  by  asserting  that  in  the  case  of  taxes  on  arti- 

^  "On  voit  combien  il  est  temeraire  d'affirmer  comme  un  principe  general  que 
tout  impot  tombe  definitivement  sur  telle  classe  de  la  societe,  ou  sur  telle  autre. 
Les  impots  tombent  sur  ceux  qui  ne  peuvent  pas  s'y  soustraire  .  .  .  mais  les 
moyens  de  s'y  soustraire  varienl  al'infini.  .  .  .  Rien  n'est  plus  incertain,  rien  n'est 
plus  variable  que  les  proportions  suivant  lesquelles  les  diverses  classes  de  la 
societe  supportent  rimpol."  —  Ibid.,  p.  566.  It  is  remarkable  that  Say  has  usually 
been  regarded  by  English  and  American  writers  as  an  exponent  of  the  equal-dif- 
fusion theory.  In  reality,  he  was  one  of  its  chief  opponents.  President  Walker 
had  already  called  attention  to  this  fact.  See  his  Political  Economy,  3d  ed., 
§608. 

2  "  Dans  une  machine  sociale  un  peu  compliqu6e,  I'impot  s'acquitte  sous  bien  des 
formes  inaper^ues."  —  Ibid.,  p.  562,  note. 


1 86  Shifting  and  hicidence  of  Taxation 

cles  of  consumption,  one  can  never  say  beforehand  by  whom 
they  will  be  borne,  because  of  the  complexity  of  the  conditions 
of  the  market.  He  discusses  the  "  abstractions  "  of  Ricardo, 
and  especially  his  theory  of  taxes  on  raw  produce  and  wages. 
Sismondi  fulminates  eloquently  against  the  doctrines  of  the 
absolute  equality  of  wages  and  of  profits,  and  of  the  com- 
plete transferability  of  labor  and  capital — the  corner-stone  of 
Ricardo's  theory.  "  What!  "  asks  Sismondi,  "  are  the  farmers 
to  become  lawyers,  or  doctors,  or  clockmakers  because  their 
wages  have  been  reduced .''  Will  the  laborers  with  horny 
hands  and  robust  bodies  all  leave  their  fields  and  shut  them- 
selves up  in  the  factories  until  agricultural  wages  have  again 
risen  ?  Beware  of  this  dangerous  theory  of  equilibrium.  Be- 
v/are  of  thinking  it  a  matter  of  indifference  where  the  burden 
is  put.  Beware  of  believing  that  if  we  tax  necessaries  of 
life,  the  poor  will  shift  the  burden  on  to  the  rich  :  A  certain 
equilibrium  will  indeed  be  attained  in  the  long  run,  but  after 
the  most  frightful  sufferings.  Before  it  is  established,  the 
failures  of  the  merchants,  who  must  abandon  their  industry, 
will  have  caused  the  nation  more  loss  than  all  the  revenue 
from  taxation ;  the  misery  and  suffering  of  the  laborers  will 
have  cost  the  nation  more  lives  than  the  most  destructive 
wars.  These  are  the  terrible  methods  of  reestablishing  the 
equilibrium.  It  is  this  that  we  see  when  we  abandon  those 
abstractions  which  never  ought  to  befog  a  science  that  deals 
with  the  happiness  and  welfare  of  men."  In  such  strong 
language  does  Sismondi  endeavor  to  combat  the  theories  of 
the  absolute  school.^     But,  while  Sismondi  is  so  heated  in  his 

1  "  Quoi !  les  cultivateurs  se  feront-ils  avocats  ou  medecins,  ou  bien  horlogers 
ou  mecaniciens,  parce  que  leurs  salaires  ne  leur  suffisent  plus  pour  vivre?  .  .  . 
Les  laboureurs,  dont  le  corps  est  accoutume  au  grand  air,  dont  les  mains  endurcies 
sont  rendues  incapables  de  toute  operation  delicate,  dont  la  sante  requiert  un 
exercice  violent,  dont  I'Sme  a  besoin  des  jouissances  des  champs,  s'enfermeront-ils 
dans  une  filature  de  coton?  Quoi !  enfin,  parce  qu'un  impot  sur  les  farines  ferait 
monter  le  pain  de  4  k  6  sous  la  livre,  les  laboureurs  quitteraient  les  champs  pour 
venir  s'enfermer  dans  les  villes,  jusqu'^  ce  que  le  salaire  des  ouvriers  des  champs 
fftt  porte  plus  haut?  .  .  .  Cxardons-nous  de  la  dangereuse  theorie  de  cet  equi- 
libre  qui  se  retablit  de  lui-meme !  Gardons-nous  de  croire  qu'il  soit  indifferent 
dans  quel  bassin  de  la  balance  on  met  ou  Ton  Ste  un  poids,  parce  que  les  autres 


The  Eclectic   Theory  187 

criticism,  he  does  not  attempt  any  constructive  work ;  he 
even  goes  so  far  as  to  say  that  he  is  unable  to  discover  any 
general  principles. 

Another  French  writer  who  treated  the  subject,  but  in  a 
manner  less  profound  than  some  of  his  successors,  is  Garnicr, 
who  contends  that,  in  the  long  run,  taxes  finally  fall  on  the 
consumer.  He  maintains,  however,  that  there  are  many  limi- 
tations which  prevent  the  producer  from  always  shifting  the 
burden  to  the  consumer.  Above  all,  he  denies  that  the  diffu- 
sion of  taxes  leads  to  an  exemption  of  the  taxpayers:  "divi- 
sion, diffusion,  and  repercussion  are  unfortunately  not  the 
synonyms  of  evaporation."  ^ 

A  more  important  writer  is  Parieu.  This  writer's  termi- 
nology is  confusing ;  he  continually  confounds  the  words 
"  incidence  "  and  "  shifting,"  and  speaks  of  direct  and  indirect 
incidence.  His  matter,  however,  is  far  better  than  his  form  of 
presentation.  Parieu  criticises  those  who  maintain  that  all 
taxes  are  added  to  the  cost  of  production,  and  thus  distributed 
to  the  consumers.  This  theory  is  false,  and  much  exaggerated, 
cries  Parieu.  If  the  argument  were  sound,  it  would  not  be 
worth  while  to  write  any  books  on  taxation,  or  to  devote  any 

ne  tarderont  pas  h  se  compenser !  Gardons-nous  de  croire  qu'en  chargeant  d'un 
impot  les  objets  de  premiere  necessite,  si  les  pauvres  en  font  I'avance,  les  riches 
finiront  par  le  rembourser  !  Un  certain  equilibre  se  retablit,  il  est  vrai,  \  la  longue, 
mais  c'est  par  une  effroyable  souffrance.  .  .  .  Mais,  avant  que  cet  equilibre  soit 
retabli,  la  faillite  de  tous  les  negociants,  dans  les  branches  d'industrie  qu'il  faudrait 
abandonner,  aurail  enleve  \  la  nation  beaucoup  plus  de  capitaux,  en  pure  perte,  que 
I'impot  n'aurait  rapporte  de  revenus  au  fisc.  De  meme  la  niortalite  parini  les 
ouvriers  qui  ne  Irouvent  plus  de  gagne-pain,  aurait  enleve  \  la  nation  plus  de  vies 
que  la  plus  desastreuse  campagne.  C'est  par  ces  moyens  terribles  cjue  la  balance 
politique  se  releve;  et,  lorsqu'on  descend  des  abstractions,  ou  il  ne  faut  jamais 
envelopper  une  science  qui  decide  du  bonheur  et  de  la  vie  des  hommes,  c'est  ainsi 
que  s'opere  le  redressement."  —  Nouveaux  Principes  d^j&conomie  Politique,  ou 
de  la  A'ic/iesse  dans  ses  Rapports  avec  la  Population,  Par  J.  C.  L.  Simonde 
de  Sismondi.  Paris,  1819,  book  vi,  chap.  6;  2d  ed.,  Paris,  1827,  ii,  pp.  219- 
223. 

^  Traite  de  Finances.  Par  Joseph  Gamier.  Paris,  1858;  4th  ed.,  1883, 
p.  26.  Gamier  errs,  however,  in  ascribing  this  theory  to  Ricardo.  It  was  the 
theory  of  Canard  and  Thiers,  not  of  Ricardo.  It  is  remarkable  that  Canard  has 
been  almost  completely  neglected  by  the  French  writers  themselves. 


1 88  Shifting  and  hicidence  of  Taxation 

thought  to  the  matter ;  for,  as  all  taxes  would  be  alike  in  their 
results,  there  would  be  no  choice  between  them.  Parieu  main- 
tains, however,  that  it  is  possible  to  lay  down  one  or  two  gen- 
eral principles,  which  he  formulates  in  this  way  :  Taxes  remain 
in  the  first  instance  on  the  original  taxpayer,  if  the  taxable 
commodity  is  not  susceptible  of  restriction  of  supply.  In 
proportion  as  the  supply  can  be  diminished,  the  tax  will  be 
shifted  to  other  classes.  If  the  individual  on  whom  the  tax 
has  been  shifted  is,  in  his  turn,  in  a  position  to  restrict  his 
enjoyments,  he  will  neutralize  in  part  the  effect  of  this  shift- 
ing, and  will  shift  the  tax  either  back  to  the  original  taxpayer 
or  on  to  some  other  class.^ 

This  leading  principle  Parieu  applies  to  the  various  kinds 
of  taxes.  There  is  no  doubt  that  he  here  strikes  the  key- 
note of  what  may  be  called  the  quantitative  or  mathematical 
theory,  which  will  be  discussed  later  on.  What  Parieu  says 
is  true,  as  far  as  it  goes,  and,  rightly  interpreted,  furnishes  a 
clue  to  many  of  the  difficulties  of  the  subject ;  but  Parieu 
devotes  only  a  few  pages  to  the  whole  topic  and  makes  no 
effort  to  get  beyond  vague  generalizations.  He  concludes 
that,  as  a  general  rule,  "the  imposition  of  taxes,  except  in 
the  case  of  taxes  on  commodities  levied  wholesale  on  the 
producer,  cannot  be  regarded  as  producing  a  shifting  which 
completely  inverts  the  first  natural  effects  of  the  tax.  In 
most  cases,  the  whole  or  the  greater  part  of  the  tax  remains 
on  him  who  pays  it  actually  or  ostensibly  in  the  first  or 
second   degree  of   the   incidence."^     Although   he  did   not 

1  "  L'impot  reste,  au  moins  immediatement,  \.  la  charge  de  celui  qui  le  paye, 
si  I'objet  sur  lequel  il  est  assis  n'est  pas  susceptible  du  restriction.  II  est  rejete  en 
tout  ou  partie  sur  d'autres  contribuables,  si  I'objet  sur  lequel  il  est  assis  est  sus- 
ceptible de  restriction,  et  la  repercussion  de  l'impot  est  en  raison  meme  de  la 
facilite  de  cette  restriction.  Si  celui  sur  lequel  l'impot  est  reflechi  est  k  son  tour 
en  6tat  de  reserrer  la  jouissance  ci  I'occasion  de  laquelle  il  revolt  le  contre-coup  dc 
la  taxe,  il  neutralisera  en  partie  I'effet  de  la  repercussion  de  l'impot  en  la  rejetant, 
soit  sur  le  contribuable  primitif,  soit  sur  d'autres."  —  Traite  des  Impbts,  consideres 
sous  le  Kapport  Historique,  Economique  et  Politique.  Par  M.  Esquirou  de  Parieu. 
Paris,  1862;   2d  ed.,  1866,  i,  p.  68. 

"^  "  L'incidence  des  taxes  ne  peut  etre  consideree  comme  realisant,  si  ce  n'est 
pour  les  denrees  frappees  en  gros  chez  les  producteurs,  une  reflexion  completement 


The  Eclectic   Theory  189 

grasp  the  whole  subject,  and  did  not  even  develop  his  own 
principle  successfully,  Parieu  deserves  more  than  a  passing 
notice  as  pointing  out  one  of  the  most  important  elements  in 
the  solution  of  the  problem. 

The  other  French  writers  have  not  contributed  materially 
to  the  solution  of  the  problem.  Thus,  the  work  of  Du 
Puynode  is  voluminous  but  not  very  critical.  He  makes  the 
whole  subject  extremely  simple.  According  to  his  theory, 
taxes  on  land  as  well  as  those  on  houses  are  ordinarily  borne 
by  the  owners:  "all  the  imaginary  distinctions  of  Smith  and 
Ricardo  are  without  foundation."^  Taxes  on  personal  prop- 
erty or  profits,  he  contends,  are  always  shifted  to  the  con- 
sumer; while  taxes  on  wages  always  rest  on  the  laborer  by 
whom  they  are  paid  in  first  instance.^  It  is  easy,  of  course, 
to  solve  the  problems  in  this  way. 

The  volumes  of  Vignes  are  important  in  the  study  of  many 
other  aspects  of  taxation,  but  his  treatment  of  incidence  is 
not  especially  noteworthy,  except  for  the  fact  that  he  opposes 
both  the  theory  of  "scepticism"  and  that  of  "equal  diffu- 
sion."^ He  deals,  however,  mainly  with  special  taxes,  and 
does  not  seem  well  acquainted  with  the  literature.  Some  of 
his  views  are  interesting  and  will  be  noticed  later. 

Finally,  Leroy-Beaulieu,  in  his  comprehensive  treatise  on 
public  finance,  skims  over  the  general  problem.  We  do, 
indeed,  find  a  few  strong  passages  scattered  through  the 
volume,  but  only  in  connection  with  special  points.*  While 
admitting  that  there  is  a  certain  element   of   truth    in    the 

destructive,  des  premiers  effets  naturels  de  I'imposition.  Dans  la  plupart  des  cas, 
tout  ou  partie  de  la  charge  reste  reellement  imposee  sur  cclui  qui  supporte  visible- 
ment  et  ostensiblement  dans  le  premier  ou  le  second  degre  de  son  incidence."  — 
Ibid.,  p.  83. 

^  De  la  Monnaie,  du  Credit  et  de  r Fmpbt.  Par  Gustave  du  Puynode.  Paris, 
1853,  ii,  p.  175 

*  Ibid.,  ii,  pp.  215,  321,  365. 

'  Traite  des  Impots  en  France.  Par  M.  Edouard  Vignes.  4th  ed.,  by  Vergni- 
aud.     Paris,  1880,  ii,  pp.  68,  97,  118,  and  173. 

*  Traite  de  la  Science  des  Finances.  Par  Paul  Leroy-Beaulieu.  5th  ed., 
1892,  i,  pp.  180,  413,  and  769-771.  In  his  recent  Traite  Theorique  et  Pratique 
d^ Economic  Politique,  2d  ed.,  1896,  Leroy-Beaulieu  devotes  several  pages  to  the 


190  Shifting  and  Incide?tce  of  Taxation 

"  general  repercussion  "  doctrine,  he  warns  his  readers  against 
placing  too  much  reliance  on  it.  We  search  through  his 
works  in  vain  for  anything  constructive.  Much  the  same 
may  be  said  of  Stourm,  whose  discussion  is  chiefly  critical  and 
negative,  and  who  renounces  any  attempt  to  solve  the  problem. ^ 

In  Germany  we  find  more  noteworthy  contributions  to  the 
subject.  The  early  German  writers  on  public  finance  — 
such  as  Soden,  Jakob,  Fulda,  Malchus,  Biersack  and  Mur- 
hard  —  may  be  passed  over  as  comparatively  insignificant. 
They  certainly  made  no  definite  impression  on  the  course  of 
the  theory.^  One  of  the  early  Germans,  von  Thiinen,  must, 
however,  be  mentioned  because  of  his  prominence  in  other 
domains  of  economic  science. 

Von  Thiinen  devotes  only  a  small  portion  of  his  remark- 
able work  to  the  problem  of  taxation,  and  there  discusses 
principally  the  incidence  of  the  land  tax.  But  his  doctrine  is 
worth  noticing  as  showing  how  the  equal-diffusion  theory, 
logically  developed,  results  in  an  absurdity.  "  It  would  seem 
then,"  he  says,  "that  the  state  can  increase  its  taxes  to  any 
conceivable  extent,  without  harming  the  community,  since 
every  active  citizen  would  bear  the  tax  only  nominally  if  he 
were  simply  to  advance  the  tax  without  paying  it  in  last 
instance.  But  this  remarkable  conclusion,"  adds  von  Thiinen, 
"  depends  on  the  assumption  that,  after  the  imposition  of 
the  tax,  the  consumption  of  commodities  remains  the  same. 
And  that  is,  of  course,  the  weak  point  of  the  theory."^ 

general  topic  (iv,  pp.  791-799),  but  contents  himself  with  a  few  unsatisfactory 
generalizations. 

^  "Aujourd'hui  on  renonce  a  ces  subtilites."  —  Systemes  Generaux  d^Impbts. 
Par  Rene  Stourm.     Paris,  1893,  p.  12.     Cf.  also  the  2d  ed.,  1903. 

2  Those  who  desire  to  study  in  detail  the  views  of  these  rather  unimportant 
writers  are  referred  to  the  books  of  Kaizl  and  Falck  (mentioned  above,  p.  17), 
who  deal  especially  with  the  German  authors. 

3  "  Die  Schliisse,  wodurch  wir  dieses  sehr  auffallende  Resultat  erhalten,  be- 
ruhen  auf  der  Voraussetzung,  dass  nach  der  Einfiihrung  der  Abgabe  die  Consum- 
tion  dieselbe  bleibt." — Der  isolirte  Staat,  in  Beziehung  auf  Landwirthschaft 
und  Nationalokonomie.  Von  Johann  Heinrich  von  Thiinen.  Hamburg,  1826, 
pp.  264-265  ;  3d  ed.,  Berlin,  1875,  P^""*^  •>  P-  337-  ^f-  ^^  translation  by  Laver- 
riere  :  Kecherches  sur  P influence  que  le  Prix  des  Grains,  la  Richesse  du  Sol  el  Us 
Impbts  exercent  sur  les  Syslemes  de  Culture.     Paris,  1851,  p.  292. 


The  Eclectic   Theory  191 

With  Rau,  however,  we  come  to  some  positive  results. 
Rau  lays  down  his  conclusions  in  the  seven  following  prin- 
ciples :  I.  A  tax  can  be  shifted  only  when  it  induces  the 
majority  of  the  taxpayers  to  a  uniform  conduct,  which  brings 
about  a  change  in  supply  and  demand.  2.  A  tax  assessed 
on  the  income  of  an  entire  class  cannot  be  easily  shifted  to 
the  vendors  of  certain  goods,  because  the  restriction  of  the 
taxpayers'  expenses  affects  different  commodities  unequally, 
so  that  the  slight  decrease  of  the  demand  will  often  be  coun- 
terbalanced by  a  decrease  of  the  supply.  3.  Taxes  will  be 
shifted  most  easily  on  the  consumers  when  all  the  sellers 
see  themselves  equally  forced  to  make  good  the  tax  by  de- 
creasing supply,  as  in  the  case  of  customs  duties.  4.  Taxes 
on  classes  with  fixed  incomes,  like  public  officials,  can- 
not possibly  be  shifted.  5.  Taxes  which  are  not  assessed 
according  to  the  quality  of  goods  for  sale  are  less  easily 
shifted  than  others.  6.  In  taxes  on  rent,  on  the  source  of 
profits,  and  on  wages  or  profits,  the  important  consideration 
is  whether  the  taxpayer  can  escape  the  tax  through  a  change 
in  investments.  7.  The  transference  of  taxation  cannot 
excuse  an  unjust  system  of  assessment,  because  {a)  the 
shifting  is  often  more  apparent  than  real,  {U)  if  only  a  few 
taxpayers  are  assessed  too  high  or  too  low,  prices  will  not  be 
affected,  {c)  in  the  interval  many  hardships  are  sure  to  ensue, 
and  (yd)  even  a  complete  shifting  of  a  high  tax  is  not  without 
bad  results  because  it  often  diminishes  both  production  and 
consumption.^  These  principles  of  Rau,  as  we  shall  see 
hereafter,  are  of  considerable  help  in  the  investigation  of 
special  problems. 

^  Grunds'dtze  der  Finanzwissenschafl.  Von  Dr.  Karl  Heinrich  Rau.  Heidel- 
berg, 1832;  5th  ed.,  1864,  iii,  pp.  412-417.  The  sixth  point  reads  as  follows: 
"  Insbesondere  kommt  es  bei  Steuern,  die  den  Ertrag  einer  einzelnen  Giiterquelle 
zu  treffen  bestimmt  sind,  darauf  an,  ob  der  Besteuerte  durch  eine  anderweitige 
Verwendung  jener  Quelle  oder  andere  Einrichtungen  der  .'Xuflage  ausweichen 
kann.  Dies  wird  in  vielen  Fallen  durch  die  Beschaffenheit  des  werbenden  Ver- 
mogens  verhindert.  .  .  .  Desshalb  bleiben  die  mcisten  Steuern  auf  den  Renten 
des  werbenden  Vermogens  liegen,  die  auch  wirklich  den  grossten  Theil  des 
steuerbaren  Einkommens  ausmachen,  oder  werden  noch  auf  sic  hinubergewalzt." 


192  Shiftmg  and  Incidence  of  Taxation 

More  important,  and  in  some  respects  the  most  suggestive 
of  the  works  hitherto  considered,  is  the  book  of  von  Hock. 
This  author  was  the  first  to  analyze  and  define  the  various 
kinds  of  shiftings  —  the  shifting  forward,  the  shifting  back- 
ward, and  the  shifting  off,  terms  to  which  allusion  has  been 
made  in  the  introduction. ^  He  maintains  that,  from  the 
standpoint  of  the  taxpayer,  the  tax  must  always  be  (i)  a  part 
of  the  cost  of  production  of  the  commodity  taxed,  (2)  a  part 
of  the  general  business  expenses,  (3)  a  part  of  the  cost  of 
subsistence,  or  (4)  a  burden  on  the  net  revenue  or  income. 
Examples  would  be,  respectively,  a  tax  on  the  manufacture  of 
spirits,  a  license  or  business  tax,  a  poll  or  house  tax,  and  an 
income  tax.  In  general,  taxes  of  class  one,  class  two  and 
class  three  —  so  far  as  the  necessaries  of  life  are  concerned  — 
are  virtually  additions  to  the  cost  of  production,  and  thus 
tend  to  be  shifted  to  the  consumer.  But  this  general  rule 
has  many  exceptions,  which  may  be  summed  up  as  follows:^ 
(a)  There  will  be  no  shifting  i^i  general  and  for  a  long  period 
when  the  tax  is  so  high  as  to  produce  a  decrease  of  demand, 
or  a  substitution  of  inferior  products  on  the  part  of  the  con- 
sumer. iU)  There  will  be  no  shifting  temporarily,  when  the 
state  of  the  market  changes  so  that  the  price  of  the  articles 
falls  below  the  price  before  the  tax  was  imposed,  {c)  The 
exceptions  to  the  shifting  of  taxes  on  necessaries  of  life  are 
far  more  frequent  and  dangerous  to  the  laborer  than  the 
above  exceptions  to  the  producer ;  for  wages  vary  frequently, 
and  an  increase  of  price  in  the  necessaries  of  life,  joined  with 
a  low  rate  of  wages,  has  the  most  lamentable  results. 

While  Hock,  therefore,  accepts  in  general  the  cost  of  pro- 
duction theory  of  taxation,  he  is  by  no  means  a  follower  of 
Canard  or  Thiers.  He  confesses  that,  in  the  long  run,  the 
shifting  of  some  taxes  will  produce  an  equilibrium  —  only 
this  is  not  a  fixed  equilibrium,  but  one  that  is  continually  dis- 

^  He  termed  these  "  Fortwalzung,"  "  Ruckwalzung  "  and  "Abwalzung" —  all 
of  them  modes  of  "  Ueberwalzung  "  or  shifting. 

2  Die  offentlichen  Abgaben  und  Schulden.  Von  Dr.  Carl  Freiherm  von  Hock. 
Stuttgart,  1863,  pp.  91-96. 


The  Eclectic   Theory  lo^ 

turbed  by  the  conditions  of  the  market  and  is  completely 
overthrown  by  every  important  economic  reform.  Above  all, 
he  adds,  it  is  not  to  be  assumed  that  this  equilibrium  is  neces- 
sarily just,  or  even  beneficial,  from  the  economic  point  of 
view;  for  under  certain  conditions  the  shifting  of  taxation 
may  increase,  and  not  decrease,  the  original  injustice.  The 
optimistic  theory  of  diffusion  is,  then,  utterly  untenable.^ 

Prince-Smith  seeks  to  solve  the  problem  in  somewhat  the 
same  way.  He  ridicules  the  diffusion  theory  which  virtually 
maintains  that  the  burden  of  taxation,  like  the  ball  in  the 
game  of  shuttlecock  and  battledoor,  is  continually  thrown 
from  hand  to  hand,  and  always  remains  suspended  in  the 
air  without  ever  falling  on  anybody.^  On  the  contrary,  says 
he,  the  shifting  of  taxation  depends  on  certain  conditions.  It 
can  take  place  only  through  increase  of  price ;  and  increase 
of  price  can  be  due  only  to  increased  demand  or  decreased 
supply.  As  the  producer  cannot  increase  the  demand,  he 
must  reduce  the  supply.  Apart  from  the  question  of  outlets 
in  international  trade,  this  is  possible  only  through  limitation 
of  production — that  is,  by  the  transfer  of  capital  and  labor 
to  other  occupations.  The  whole  problem  of  shifting  thus 
reduces  itself  to  the  question:  Which  is  more  injurious  —  to 
bear  the  tax  without  shifting,  or  to  suffer  through  the  limita- 
tion of  production .-'  In  general,  he  concludes,  a  tax  will  be 
shifted  only  when  the  transfer  brings  in  more  than  it  costs. 
In  other  words,  the  whole  question  of  incidence  is,  according 
to  Prince-Smith,  simply  a  question  of  calculation.  Applying 
his  theory  to  practical  cases,  he  thinks  that  the  land  tax  and 

1  "  Es  ist  allerdings  wahr,  dass  die  Uberwalzung  der  Steuern  zulezt  cine 
Ausgleichung  zur  Folge  habe,  allein  das  hierdurch  hergestellte  Gleichgewicht  ist 
ein  lal)iles,  das  jeden  Augenblick  durch  die  Schwankungen  des  Marktes  gestort 
und  durch  jede  tiefer  greifende  wirthschaftliche  Reform  ganz  aufgehoben  wird. 
.  .  .  Es  kann  unter  gewissen  politischen  und  commerciellcn  Vorbedingungcn  die 
Steuer  durch  fortgesetzte  Ueberwiilzungen  cben  so  leicht  ungerechter  und  schad- 
licher  warden  als  das  Gegentheil."  —  fbid.,  pp.  io8,  109. 

"^  "  Ueber  die  Abwal/.ung."  Von  John  Prince-Smith.  In  V'ierteljahrschrifl 
fur  Volkswirthschaft  und  Kultu7geschichte,  xiii  (i866),p.  130.  Reprinted  in  his 
Gesammelte  Schriften.     Berlin,  1877,  i,  pp.  43-64. 


194  Shifting  and  Incidence  of  Taxation 

the  house  tax  cannot  be  shifted,  and  that  the  indirect  taxes 
or  taxes  on  wages  can  be  shifted  only  through  the  bankruptcy 
of  the  weakest,  and  that  bankruptcy  of  the  laborer  means 
starvation  and  death.  As  a  protest  against  the  absolute  and 
diffusion  theories,  Prince-Smith  makes  a  strong  case,  although 
some  of  his  own  positions  are  not  always  tenable. 

The  more  recent  German  writers  on  public  finance  have, 
with  few  exceptions,  done  little  to  advance  investigation 
along  these  lines.  For  example,  Roscher  follows  in  the  main 
the  exposition  of  the  older  English  writers.^  Schaffle  deals 
chiefly  with  the  question  of  capitalization.^  Wagner,  even  in 
the  last  edition  of  his  great  work,  bases  his  exposition  pri- 
marily on  the  works  of  Rau  and  Hock,  and  does  not  really 
get  beyond  them.^  Cohn  contents  himself  with  a  few  vague 
generalizations  which  are  of  little  use.*  Vocke  practically 
limits  himself  to  the  statement  that  reliance  on  the  general 
shifting  of  taxes  is  treacherous,  and  that  the  whole  subject 
properly  belongs  to  the  general  economic  doctrine  of  cost  of 
production.^  Von  Schall,  the  author  of  the  latest  monograph 
on  taxation,  devotes  four  and  a  half  pages  to  the  topic  of 
shifting.  We  accordingly  find  in  his  exposition  little  but 
platitudes.^  In  fact,  the  recent  German  literature  is  signifi- 
cant mainly  for  the  fact  that  it  attempts,  sometimes  very 
successfully,  to  evade  the  difficulties  of  the  problem. 

^  System  der  Finanzwissenschaft.  Von  Wilhelm  Roscher.  Stuttgart,  1886, 
§§  38-43- 

"^  Die  Grunds'dtze  der  Steuerpolitik  und  die  Schwebenden  Fittanzfragen.  Von 
Dr.  Albert  E.  Fr.  Schaffle.  Tubingen,  1880,  pp.  173-192.  His  most  recent  work 
discusses  the  topic  somewhat  more  broadly,  but  is  somewhat  lacking  in  precision. 
Die  Steuern,  Allgemeiner  Theil,  1895,  drittes  Buch,  I  Haupteintheilung,  IV  Ab- 
schnitt,  3  Kapitel. 

3  Finanzwissenschaft.  Von  Adolph  Wagner.  Leipzig,  1880,  ii;  2d  ed.,  1890, 
PP-  332-372- 

*  System  der  Finanzwissenschaft.  Von  Gustav  Cohn.  Stuttgart,  1889,  pp. 
304-311.  English  translation  by  T.  B.  Veblen  under  the  title  of  The  Science  of 
Finance.     Chicago,  1895,  PP-  365-373- 

*  Die  Grundziige  der  Finanzwissenschaft.  Von  Dr.  Wilhelm  Vocke.  Leipzig, 
1894,  PP-  205-212. 

®  "  Allgemeine  Steuerlehre."  Von  K.  Fr.  v,  Schall.  In  Schonberg's  Handbuch 
der politischen  Oekonomie.     Tiibingen,  4th  ed.,  iii,  1897,  PP-  236-240. 


The  Eclectic    Theory  195 

The  English  writers  who  have  not  yet  been  mentioned  may 
be  passed  over  with  a  few  words.  Richard  Jones  was  one  of 
the  first  to  deny  the  Ricardian  doctrine  of  incidence,  as  he 
was  the  first  to  dispute  Ricardo's  theory  of  distribution.  He 
confined  himself  almost  exclusively  to  the  tax  on  wages  and 
that  on  consumable  commodities.  Jones  maintained  that  it 
is  impossible  to  tell  beforehand  the  ultimate  incidence  of  a 
tax  on  wages ;  for  this,  he  said,  depends  upon  the  effect  of 
the  tax  upon  the  movements  of  population.  If  the  tax  were 
laid  on  wages,  under  such  circumstances  that  it  would  not 
affect  the  movement  of  population  but  would  be  met  by  a 
sacrifice  of  secondary  gratifications,  it  would  not  be  shifted. 
Only  under  conditions  the  reverse  of  these  would  the  tax  be 
shifted  from  wages  to  profits.^ 

David  Buchanan  had  preceded  Jones  in  controverting  some 
of  Adam  Smith's  doctrines  on  incidence.  He  took  exception 
to  the  distinction  between  the  ground  rent  and  the  building 
rent  in  the  house  tax.^  Above  all,  he  opposed  the  view  that 
a  tax  on  labor  will  produce  a  corresponding  rise  in  wages.  If 
wages  were  always  at  the  bare  minimum  point,  then  indeed, 
he  admitted,  the  doctrine  might  be  true;  but  "while  the 
wages  of  labor  afford  comforts  and  even  luxuries,  the  laborer 
will  always  possess  a  fund  for  the  payment  of  taxes.  .  .  .  All 
taxes  on  labor,  or  on  such  commodities  as  the  laborer  con- 
sumes, take  effect  by  abridging  his  comforts.  They  increase 
the  hardships,  and  tend  generally  to  degrade  the  condition  of 
the  laboring  classes."^  We  have  already  seen  that  the  argu- 
ment of  Buchanan  induced  Ricardo  to  make  a  qualification  of 
his  rigid  theory.* 

^  "Tract  on  the  Incidence  of  Taxes  on  Commodities  that  are  consumed  by 
the  Laborer."  By  Rev.  Richard  Jones.  In  Literary  Remains,  consisting  of 
Lectures  and  Tracts  on  Political  Economy.  London,  1858,  pp.  143.  Cf.  "  A 
Short  Tract  on  Political  Economy,"  ibid.,  p.  277. 

'^  An  Inquiry  into  the  Nature  and  Causes  of  the  Wealth  of  Nations.  By 
Adam  Smith,  LL.I).  With  Notes  and  an  Additional  Volume,  by  David  Buchanan. 
Ediiihurgh,  181 7,  iii,  p.  300,  note. 

^  Ihid.,  jip.  338,  339.  See  also  Observations  on  the  Subjects  treated  of  in  Dr. 
Smith'' s  Inquiry,  etc.     By  David  Buchanan.     Edinburgh,  181 7,  2d  ed.,  pp.  59-64. 

*  Above,  p.  119. 


196  Shifting  and  Incidence  of  Taxation 

James  Mill,  although  he  seeks  to  differentiate  the  doctrine 
in  some  points,  is,  on  the  whole,  a  follower  of  Ricardo.  Mill 
maintains  that  a  tax  on  produce  or  on  farmers'  profits  is 
shifted  to  the  consumer.  So,  also,  he  says,  a  tax  on  profits  of 
stock  will  fall  on  profits.  On  the  other  hand,  Mill  accepts 
Ricardo's  theory  of  the  tax  on  wages,  but  only  on  the  assump- 
tion that  wages  are  at  the  lowest  point  to  which  they  can  be 
reduced.  Otherwise,  he  thinks,  a  tax  on  wages  will  not  be 
shifted  to  profits.^ 

Senior  confines  his  discussion  to  a  few  points.  He  agrees 
that  taxes  on  manufactured  commodities  raise  the  price,  gen- 
erally by  a  sum  exceeding  the  amount  of  the  tax.  But  he 
takes  issue  with  Ricardo  in  regard  to  a  tax  on  agricultural 
produce.  Senior  maintains  that,  while  the  immediate  effect 
of  such  a  land  tax  is  to  raise  prices,  its  ultimate  effect  is  to 
diminish  both  the  production  and  the  consumption  of  raw 
produce,  and  therefore  to  leave  its  price  unaffected.  Tithes 
will,  therefore,  not  be  shifted  to  the  consumers.^ 

John  Stuart  Mill  keeps,  in  the  main  lines,  to  the  arguments 
of  his  predecessors.  He  assumes  perfectly  free  competition 
and  the  complete  transferability  of  capital,  and  on  these 
assumptions  builds  up  his  whole  superstructure.  He  follows 
Ricardo,  except  in  three  points.  In  the  first  place,  he  accepts 
Senior's  emendation  of  the  doctrine  of  tithes,  that  in  the  long 
run  the  incidence  is  on  the  landowner,  and  not  on  the  con- 
sumer. Secondly,  he  accepts  the  view  of  his  father  as  to  the 
incidence  of  a  tax  on  wages.  Thirdly,  he  analyzes  more 
closely  the  incidence  of  taxes  on  exports  and  imports.^ 

McCulloch  displays  independence  in  only  one  point.  A 
special  tax  on  profits,  he  contends,  will  not  necessarily  raise 
prices,  as  Ricardo  thought:  instead  of  being  shifted  to  the 

1  Elements  of  Political  Economy.  By  James  Mill,  Esq.  3d  ed.,  1844,  chap, 
iv,  sec.  v-xiii,  pp.  248-292.  In  the  first  ed.  of  1821  this  qualification  is  not 
found.      Cf.  pp.  206-208. 

'^Political  Economy.  By  Nassau  William  Senior.  London,  1835;  6th  ed., 
1872,  pp.  120-124. 

^  Principles  of  Political  Economy.  By  John  Stuart  Mill.  London,  1847,  book 
V,  chap,  iv,  §4;   chap,  iii,  §  4;   and  chap,  iv,  §6. 


The  Eclectic   Theory  197 

consumer,  it  may  lead  to  a  reduction  of  cost.  McCulloch 
points  out  that  the  producer  will  endeavor  to  meet  the  press- 
ure of  the  tax  and  to  defeat  it  by  greater  skill  and  industry, 
by  increased  facility  of  production,  or  by  a  saving  of  expense, 
so  that  the  tax  will  not  continue  to  fall  on  him.  Further- 
more, it  will  not  fall  on  the  consumer,^  In  reality,  however, 
this  doctrine  explains,  not  any  process  of  shifting,  but  what 
was  termed  in  the  introduction  the  "transformation"  of  taxa- 
tion ;  which  is  a  very  different  thing.  This  idea  of  transform- 
ation may  accordingly  be  said  to  have  been  introduced  into 
scientific  discussion  by  McCulloch. 

So  far  as  a  tax  on  wages  is  concerned,  McCulloch  accepts 
the  general  proposition  of  Ricardo,  but  thinks  that  the  shift- 
ing of  the  tax  to  profits  may  be  true  only  in  the  long  run. 
There  is  a  possibiHty  that  in  the  interim  the  laborers'  stand- 
ard of  life  may  be  lowered.  The  real  injury,  however,  entailed 
on  laborers  by  taxes  on  wages  consists  in  the  fact  that  "  by 
falling  on  profits  they  tend  to  diminish  the  power  to  accumu- 
late capital "  and  thus  incidentally  to  lessen  the  wages-fund.^ 
It  is  true  that  McCulloch  does  not  favor  taxes  on  wages,  but 
he  is  not  opposed  to  taxes  on  the  necessaries  of  life,  because 
according  to  his  general  doctrine  "  a  tax  on  any  article  con- 
sumed by  them,  provided  it  be  not  excessive,  never  fails  to 
make  them  more  industrious,"  ^  or,  as  he  puts  it  in  another 
plan,  "more  thrifty  and  less  improvident  in  entering  into  mat- 
rimonial connexions."*  The  misery  of  the  poor,  according  to 
McCulloch,  is  due  not  to  the  taxes  on  articles  of  necessity, 
but  to  their  "  want  of  providence  and  the  dissipated  habits 
that  are  so  widely  spread."  ^ 

^  A  Treatise  on  the  Principles  and  Practical  Influence  of  Taxation  and  the 
Funding  System.     By  J.  R.  McCulloch.     London,  1845;   3^^  ^*^>  '^^3'  P-  T^- 

"^  Op.  cit.,  p.  107.  '  Ibid.,  p.  92.  *  Ibid.,  p.  96. 

^  Ibid.,  p.  98.  In  his  original  article  in  the  Edinburgh  Review  for  January,  1820, 
pp.  1 61-162,  McCulloch  pointed  out  the  possibility  of  the  laborer  being  injuriously 
affected  by  a  tax  on  wages  or  on  necessaries.  But  when  he  says  that  the  Ricardian 
doctrine  "  must  be  received  with  very  great  modifications,"  he  refers  not  to  the 
ultimate  results,  but  only  to  the  interval  between  the  imposition  of  the  tax  and 
the  consequent  changes  in  population.    "  A  slow  and  gradual  increase  of  taxation," 


198  Shifting  and  Incidence  of  Taxation 

The  treatment  of  the  subject  by  Fawcett  is  remarkable, 
first,  for  the  exaggeration  of  some  of  the  extreme  statements 
of  the  older  economists,  —  as,  for  example,  the  contention 
that  a  tax  on  commodities  raises  prices  far  beyond  the  amount 
of  the  tax  and,  secondly,  for  the  somewhat  vague  ideas  on 
the  incidence  of  local  taxation.^  As  both  these  points  will  be 
fully  treated  later,  we  may  omit  them  here. 

An  interesting  criticism  of  the  older  theories  is  to  be  found 
in  the  work  of  CHffe-Leslie.  This  able  writer  pointed  out 
that  the  older  conclusions  were  frequently  too  rigid.  "The 
theoretical  canons  commonly  applied  to  determine  the  inci- 
dence of  taxes,"  said  he,  "are  often  misleading.  They  fur- 
nish us  simply  with  inferences  from  ideal  'average,'  or 
'natural,'  rates  of  wages  and  profit,  respecting  the  'tenden- 
cies '  of  taxes  '  in  the  long  run  '  and  in  the  absence  of  disturb- 
ing causes."  But  taxes  are  paid  immediately,  under  the  real 
conditions  of  life,  and  "  out  of  the  actual  wages,  or  profits,  or 
other  funds  of  individuals,  not  out  of  hypotheses  or  abstrac- 
tions in  the  minds  of  economists."  ^  Cliffe-Leslie  called 
attention  to  the  effects  of  economic  friction  in  neutralizing 
the  working  of  supposed  immutable  laws,  and  in  producing 
practical  effects  sometimes  the  very  reverse  of  those  assumed. 
He  confined  his  arguments,  however,  to  a  few  taxes ;  and  his 
own  constructive  work  is  not  very  elaborate.  His  special 
doctrines  will  be  noticed  below. 

he  tells  us,  "  by  adding  to  the  efficacy  of  the  principle  of  moral  restraint  has  a  ten- 
dency to  raise  the  rate  of  wages,  and  consequently  to  throw  the  burdens  from  the 
shoulders  of  the  laborer  to  those  of  the  employer."  Moreover,  as  the  extracts  in 
the  text  show,  McCulloch  later  on  came  more  and  more  to  emphasize  the  beneficial, 
rather  than  the  injurious,  consequences  of  taxes  on  necessaries.  I  can  therefore 
not  quite  agree  with  Professor  Hollander  when  he  says  (^Letters  of  Ricardo  to 
McCulloch,  1895,  P-  ^)  that  I  "  have  hardly  done  him  [McCulloch]  justice  in 
this  connection." 

^  Manual  of  Political  Economy.  By  the  Rt.  Hon.  Henry  Fawcett.  London, 
1863;  6th  ed.,  1883,  esp.  pp.  551  and  613. 

2  "  The  Incidence  of  Imperial  and  Local  Taxation  on  the  Working  Qasses." 
By  Thomas  Edward  Cliffe-Leslie.  In  his  Essays  in  Political  and  Moral  Philoso- 
phy, London,  1879;  2d  ed.  under  the  title  Essays  in  Political  Economy,  London, 
1888,  pp.  388,  389. 


The  Eclectic   Theory  199 

A  more  recent  treatment  of  the  subject  is  to  be  found  in 
the  two  general  treatises  on  the  science  of  finance  by  Professor 
Bastable  and  Professor  Graziani,  both  of  them  pubHshed  since 
the  first  edition  of  this  work.  Professor  Bastable  takes  a  more 
realistic  view  of  the  problem  than  many  of  his  English  pred- 
ecessors. He  not  only  devotes  a  chapter  to  the  general 
discussion,^  but  appends  some  interesting,  though  brief,  ob- 
servations on  the  incidence  of  particular  taxes.  Much  the 
same  may  be  said  of  the  treatment  of  the  subject  by  Pro- 
fessor Graziani.2     The  views  of  both  writers,  which  will  be 

1  Public  Finance.  By  C.  F.  Bastable.  London,  1892;  3d  ed.,  1903,  book  iii, 
chap,  v:  "The  Shifting  and  Incidence  of  Taxation." 

■•^  Istituzioni  di  Scienza  delle  Finanze.  Da  Augusto  Graziani.  Torino,  1897; 
2d  ed.,  190,  libro  v,  capit.  iv:  "La  Repercussione  delle  Imposte." 

Since  the  second  edition  of  this  book  was  published  three  works  on  the  gen- 
eral subject  have  appeared.  M.  Ch.  de  Lauwereyns  de  Roosendaele,  a  young 
lawyer  of  Lille,  France,  published  in  1907  a  book  entitled,  La  Repercussion 
de  Plmpol."  Paris,  445  pp.  This  work,  which  is  evidently  a  doctor's  disserta- 
tion, is  in  its  historical  part  (which  constitutes  three-quarters  of  the  whole)  a 
faithful  reproduction  of  my  book.  The  author  acknowledges  his  obligations  in 
the  preface  and  in  various  footnotes.  The  positive  part  calls  for  no  especial 
mention.  On  the  other  hand,  in  the  same  year  Mr.  Lawson  Purdy,  then  secre- 
tary of  the  New  York  Tax  Reform  Association,  and  now  (1909)  at  the  head  of 
the  New  York  City  Board  of  Taxes  and  Assessments,  issued  an  admirable  little 
tract  of  thirty-nine  pages  on  The  Burdens  of  Local  Taxation  and  Who  Bears 
Them  (Public  Policy  Publishing  Co.,  Chicago).  In  this  work  each  of  the  con- 
stituent elements  of  the  general  property  tax  is  considered  in  turn.  The  con- 
clusions are  in  harmony  with  those  expressed  in  this  volume.  Finally,  in  1909 
Fabrizio  Natoli,  a  privat-docent  in  Palermo,  published  his  Studi  su  gli  Effetti 
Economici  delP  Lmposta,  Florence,  109  pp.  The  first  part  of  this,  which  is  an  ad- 
mirable discussion  primarily  of  nomenclature,  has  been  noticed  above  in  the  In- 
troduction. The  second  part  deals  chiefly  with  the  shifting  and  incidence  of  a 
tax  on  money,  a  problem  which  is  to-day  of  no  practical  importance. 

The  Academy  of  Moral  and  Political  Science  in  France  offered  the  Rossi 
prize  in  1887  to  the  best  work  on  the  shifting  of  taxation.  The  prize  was 
awarded  to  Albert  Delatour.  M.  Leon  Say,  secretary  of  the  commission  of 
award,  stated  that  "it  would  soon  be  published."  Only  one  short  chapter,  how- 
ever, has  appeared,  and  this  is  devoted  entirely  to  the  question  of  the  incidence 
of  a  tax  on  interest.  See  the  article  by  Delatour  entitled  "LTncidence  des 
Impots  sur  ITnter^t  des  Capitaux  "  in  Annates  de  FEcole  libre  des  Sciences  Poli- 
tiques,  vol.  3,  1888,  pp.  357-367. 

Professor  Jacopo  Tivaroni  of  Cremona  has  also  recently  published  an  excellent 
compendium  of  seventy-eight  pages  on  the  subject  under  the  title   Traslazione  ed 


200         Shifting  and  Incidence  of  Taxation 

considered  hereafter,  are  largely  in  harmony  with  those  con- 
tained in  the  second  part  of  this  investigation.* 

Incidenza  delle  Jmposte,  Elementi  della  Teoria,  Verona,  1905.     This  monograph 
also  accepts  most  of  the  conclusions  reached  in  the  present  work. 

1  The  most  recent  discussion  of  the  general  topic  is  concerned  with  the  prob- 
lem of  capitalization.  Some  implications  of  the  doctrine  are  discussed  in  a  sug- 
gestive way  by  Professor  Thomas  S.  Adams  in  "Tax  Exemption  through  Tax 
Capitalization"  in  The  American  Economic  Review,  vi  (1916),  271-287.  A 
reply  to  this  by  the  present  writer  appeared  under  the  same  title,  ibid.,  vi,  790- 
807.  The  point  at  issue  was  further  discussed  in  two  articles  with  the  same  title 
in  the  Bulletin  of  the  National  Tax  Association,  ii  (1916-1917),  Professor 
H.  G.  Hayes  (pp.  69-73)  siding  with  Professor  Adams,  while  Professor  R.  M. 
Haig  (pp.  198-200)  espoused  the  other  side.  Cf.  also  H.  J.  Davenport,  "Theo- 
retical issues  in  the  single  tax  "  in  The  American  Economic  Review,  vii,  26-28. 
The  entire  controversy  was  reviewed  by  Professor  Benvenuto  Griziotti  in  his 
Teoria  delP  ammortamento  delle  imposte  e  sue  applicazioni,  1918,  who  upholds 
the  present  writer's  position  in  the  following  statement :  "  ora  a  me  sembra  che 
abbia  ragione  il  Seligman,  nella  replica  alle  critiche  dell'  Adams,  di  osservare  che 
questi,  attraverso  incertezze  di  pensiero  e  contraddizioni,  viene  ad  ammettere 
quanto  precisamente  sostengono  il  Seligman  e  con  lui  i  principali  difensori 
della  teoria  dell'  ammortamento"  (pp.  21-22). 


CHAPTER   VI 

The  Negative  or  Agnostic  Theory 

The  doctrine  that  it  is  impossible  to  form  any  general 
conclusions  about  the  subject  of  shifting  scarcely  seems  to 
merit  a  place  in  the  list  of  theories  of  incidence.  Yet,  as  this 
is  an  opinion  not  infrequently  met  with  among  practical  men, 
it  will  be  well  to  give  it  passing  attention. 

The  ablest  expounder  of  this  theory  is  Adolf  Held.  His 
discussion  of  incidence  is  based  on  a  denial  of  cost  of  produc- 
tion as  a  condition  of  normal  profits.^  Held  follows  Schaffle 
in  generalizing  the  rent  conception,  and  is,  to  this  extent,  a 
forerunner  of  the  recent  English  and  American  writers  who 
adopt  the  same  idea.  This  conception,  applied  to  profits, 
results  in  the  theory  of  greatest  or  marginal  cost,  and  in  the 
explanation  of  profits  as  the  difference  between  marginal  cost 
and  market  price.  Held,  however,  does  not  draw  the  correct 
conclusions  from  his  theory.  He  was  an  acute  thinker,  and 
a  man  of  the  noblest  ideals ;  but  he  became  so  imbued  with 
the  idea  that  all  of  the  old  political  economy  was  worthless 
that  his  strictures  are  as  often  false  as  true.  Like  so  many 
of  the  younger  Germans,  he  was  stronger  in  criticism  than 
in  construction ;  and  his  own  positive  contributions  to  pure 
theory  are  not  very  profound.  His  whole  treatment  rests  on 
a  misunderstanding,  which  sometimes  almost  seems  to  be  a 
wilful  perversion,  of  the  doctrine  of  cost  of  production.  It 
would  not  repay  us  to  discuss  all  his  points  in  detail,  as  even 
the  Germans  themselves,  who  were  at  one  time  deeply  im- 
pressed with  his  views,  have  now    repudiated    his   extreme 

^  "  Zur  Lehre  von  dcr  Ucberwalzung  der  Stcuern."  Von  Adolf  Held.  —  In 
Tubinger  Zeitschrift  fiir  die  gesammte  StaatrwisseHSchaft,  l868,  pp.  422-495. 

201 


202  Shiftmg  and  Incide^ice  of  Taxation 

doctrines.  His  conclusions  are  chiefly  negative,  and  may  be 
summed  up  in  the  confession  that  we  can  know  nothing 
about  the  whole  subject  of  incidence.^  From  Held,  there- 
fore, we  learn  nothing  positive.  His  conclusions,  moreover, 
have  been  accepted  only  by  writers  of  such  little  standing 
that  any  further  consideration  of  the  agnostic  theory  is 
unnecessary. 

Somewhat  the  same  position  has  been  adopted  by  a  few 
English  writers.  Thus,  in  a  recent  report.  Sir  Edward 
Hamilton  and  Sir  G.  Murray  declare  that  the  problem  is 
"  insoluble,"  and  that  "  incidence  must  be  mainly  a  matter  of 
conjecture  and  speculation."^ 

So  also  Lord  Avebury  seems  to  hold  the  same  opinion 
when  he  states  that  "as  to  the  attempts  to  determine  with  any 
scientific  precision  the  exact  incidence  either  of  rates  or  taxes, 
the  only  answer,  says  Professor  Nicholson,  'is  that  an  answer 
is  impossible.'"^ 

^  Cf.,  as  a  sample,  the  following  conclusion  :  "  Ueber  die  Abwalzung  der  Kapi- 
talzinssteuer  lasst  sich  also  gar  nichts  sagen,  sie  lasst  sich  nicht  einmal  allgemein 
leugnen." —  Tiibinger  Zeitschrifl  fur  die  gesammte  Staatswissenschaft,  p.  481. 

^  "  The  equitable  distribution  of  the  burden  of  taxation  involves  the  insoluble 
problem  of  incidence."  —  Report  by  Sir  Edward  Hamilton  and  Sir  George 
Murray,  in  Royal  Commission  on  Local  Taxation,  Final  Report,  1901  [Cd.  38], 
p.  109. 

3  "  Inaugural  Address  on  Local  and  Imperial  Burdens,"  by  Lord  Avebury.  In 
Journal  of  the  Royal  Statistical  Society,  vol.  64  (1901),  p.  558. —  Lord  Avebury 
is  mistaken  in  attributing  this  opinion  to  Professor  Nicholson,  who,  in  the  passage 
quoted,  limited  his  observation  to  the  incidence  of  import  and  export  duties. 
Even  as  to  these,  however,  Professor  Nicholson  subsequently  modified  his  opin- 
ion. Cf.  his  Principles  of  Political  Economy,  iii  (1901),  pp.  342-349.  —  The 
quotations  which  Lord  Avebury  makes  from  my  book  refer  expressly  only  to  the 
early  pre-scientific  theories — a  fact  which  Lord  Avebury  neglects  to  mention. 
Cf.  also  in  general,  on  this  point,  Bastable,  Public  Finance,  3d  ed.  (1903), 
p.  371- 


CHAPTER   VII 
The  Socialistic  Theory 

What  is  here  termed  the  socialistic  theory  of  incidence 
really  ought  not  to  be  put  on  a  level  with  the  general  theories 
discussed  in  the  earlier  chapters ;  for  it  is  a  doctrine  that  is 
confessedly  partial  in  character.  But  its  application  is  so 
general,  and  its  propagation  among  large  classes  influenced 
by  the  socialistic  leaders  is  so  earnest,  that  it  deserves  a  few 
words. 

The  theory  was  developed  primarily  by  the  great  agitator 
Lassalle.  Lassalle  devotes  himself  especially  to  the  consid- 
eration of  the  laborer's  interests.  He  terms  indirect  taxes 
all  those  which  are  not  assessed  directly  on  individual  income 
or  property,  including,  therefore,  under  this  head  not  only 
taxes  on  consumption,  but  also  land  and  business  taxes.  All 
these  indirect  taxes  —  in  Germany,  for  instance  —  fall  ulti- 
mately, says  Lassalle,  on  the  poorer  classes  of  society ;  for, 
since  the  laborer  has  not  sunk  quite  so  low  as  the  Irish  work- 
man or  the  Indian  ryot,  a  little  more  can  be  taken  from  his 
wages  before  reducing  him  to  starvation.  Adam  Smith  and 
Ricardo,  who  were  correct  enough  in  their  theory  of  the  inci- 
dence of  taxes  on  produce,  he  continues,  are  here  mistaken ; 
since  it  is  a  scientific  fact  that  wages,  as  compared  with  other 
commodities,  are  always  the  last  to  rise  in  price.  It  is  there- 
fore the  laborer  who  bears  all  the  so-called  indirect  taxes  — 
that  is,  the  greater  part  of  all  taxes. ^ 

This  exaggerated  doctrine  has  been  accepted  not  only  by 
most  of  the  socialistic  theorists,  but  also  by  popular  writers 

1  Die  indirekte  Steuer  und  die  Lage  der  arbeitendtn  JClassen.  By  Ferdinand 
Lassalle.     Zurich,  1863,  pp.  9,  36,  41,  etc. 

203 


204  Shifting  and  Incidence  of  Taxation 

who  are  very  far  removed  from  socialism.  Mr.  Thomas  G. 
Shearman,  for  instance,  while  indeed  limiting  the  definition 
of  indirect  taxes  more  narrowly  than  Lassalle,  is  equally 
extravagant  in  his  statement  of  their  incidence  and  effects.^ 
The  more  modern  and  more  scientific  view,  on  the  other 
hand,  is  that  there  is  nothing  inherently  bad  about  an  indi- 
rect tax,  just  as  there  is  nothing  inherently  good  about  a 
direct  tax.  It  depends  entirely  upon  what  kind  of  a  direct 
or  indirect  tax  it  is.  There  are  some  good  indirect  taxes 
which  do  not  fall  on  the  laborer  at  all ;  just  as  there  are  some 
bad  direct  taxes  which,  as  we  shall  see  later,  do  fall  on  the 
laborer. 

^  Natural  Taxation.  An  Inquiry  into  the  Practicability,  Justice  and  Effecti 
of  a  Scientific  and  Natural  Method  of  Taxation.  By  Thomas  G.  Shearman. 
New  York,  1895.     See  esp.  chap,  ii,  "  Crooked  Taxation." 


CHAPTER  VIII 

The  Quantitative  or  Mathematical  Theory 

The  authors  who  have  in  some  respects  done  the  best  work 
in  the  study  of  the  incidence  of  taxation  are  precisely  those 
who  have  until  recently  been  largely  neglected.^  They  may 
be  called,  for  lack  of  a  better  name,  the  quantitative  or 
mathematical  school.  They  are  united  not  so  much  by 
similarity  of  conclusions  as  by  identity  of  method. 

Of  these  the  earliest  and  most  suggestive  is  Cournot.  He 
started  out  from  the  assumption  that  the  whole  theory  of 
incidence  is  an  integral  and  necessary  part  of  the  general 
theory  of  value.  In  his  first  and  most  profound  work,^  in 
which  he  laid  down  many  of  the  general  principles  which 
to-day  form  essential  parts  of  the  newer  doctrines  in  pure 
economics,  he  attempted  to  apply  his  theory  of  value  to  the 
study  of  taxation.  Cournot  studied  commodities  under  the 
regime  of  monopoly  and  of  competition  respectively,  and 
employed  the  methods  of  differential  calculus  to  ascertain 
what  influence  an  increase  in  the  supply  price  of  any  com- 
modity would  have  on  the  producer  as  well  as  on  the  con- 
sumer. He  analyzed  the  laws  of  constant,  increasing  and 
diminishing  returns  in  their  relations  to  this  influence,  and  he 
came  to  some  important  conclusions  which  will  be  discussed 
in  the  second  part  of  this  work. 

While  it  is  undeniably  a  relief  to  read  the  clear-cut  and 

^  Not  one  of  the  recent  German  or  French  elaborate  works  on  finance  refers  to 
a  single  member  of  this  school.     Kaizl  and  Falck  also  neglect  them  completely. 

2  Recherches  sur  its  Principes  Matheniatiques  de  la  Thiorie  des  Richesses. 
Par  Augustin  Cournot.  Paris,  1838,  chaps,  vi  and  viii.  An  English  translation 
was  published  in  1898  in  Professor  Ashley's  Series  of  Economic  Classics,  under 
the  title  of  Researches  into  the  Mathematical  Principles  of  tJie  Theory  of  Wealth. 

205 


2o6  Shifting  and  Incidence  of  Taxation 

precise  doctrines  of  Cournot,  as  compared  with  the  vague 
and  misty  generalizations  of  many  writers  of  the  eclectic 
school,  his  treatment  of  incidence  is  not  entirely  adequate. 
His  whole  study  is  practically  a  discussion  of  the  incidence  of 
taxes  on  commodities.  He  fails  to  remember  that  there  are 
other  taxes  besides  those  on  commodities  and  on  profits ;  and 
he  ignores  the  fact  that  to  regard  a  tax  as  raising  the  normal 
supply  price  or  the  cost  of  production  does  not  exhaust  the 
possibilities  of  the  case.  It  is  true,  indeed,  that  in  a  later 
work  1  he  attempts  to  discuss  the  incidence  of  taxation  with- 
out the  use  of  mathematics,  and  to  extend  the  discussion  to 
other  taxes.  But  this  attempt  is  not  always  successful.  In 
certain  cases  —  for  example,  the  tax  on  buildings  —  his  views 
are  even  erroneous.  Moreover,  whole  classes  of  taxes,  like 
that  on  wages,  are  omitted ;  and  no  attempt  is  made  to  lay 
down  any  general  conclusions.  So  far  as  the  study  of  the 
taxation  of  commodities  is  concerned,  however,  Coumot's 
book  has  scarcely  been  surpassed. 

Some  of  Coumot's  ideas  were  developed  by  another  French 
mathematician,  Fauveau.  He  added  practically  nothing, 
however,  except  a  series  of  elaborate  mathematical  formulae, 
and  is  to  be  noticed  mainly  because  of  his  energetic  opposi- 
tion to  the  optimistic  theory.  "The  diffusion  of  taxes,"  says 
he,  "cannot  render  taxes  proportional  any  more  than  the 
diffusion  of  light  makes  a  room  equally  illuminated  in  every 
part,  whatever  be  the  position  of  the  candle."  ^  Fauveau 
concludes  rather  sadly  that  it  is  quite  as  easy  for  an  originally 
equal  tax  to  become  unequal  in  its  operation  as  for  an  origi- 
nally unequal  tax  to  become  equal. 

Many  years  later  an  attempt  of  a  similar  nature  was  made 
by  an  English  mathematician,  Fleeming  Jenkin.  Jenkin's 
essay  deals  chiefly  with  what  he  calls  taxes  on  commodities. 

1  Principes  de  la  Theorie  des  Richesses.     Paris,  1863,  book  iii,  chap.  viii. 

'  "  La  diffusion  de  I'impot,  nous  parait-il,  ne  peut  pas  le  rendre  en  definitive 
proportional  pas  plus  que  la  diffusion  de  la  lumiere  ne  fait  qu'une  chambre  est 
eclaircie  egalement  en  tous  ses  points  quel  que  soit  I'endroit  de  cette  chambre  ou 
Ton  a  plac^  une  bougie."  —  Considerations  Mathimatiques  sur  la  Theorie  de 
VImpbt.     Par  G.  Fauveau.     Paris,  1864,  p.  58. 


The  Mathematical  Theory  207 

Although  he  evidently  knew  nothing  of  Cournot,  Jenkin  was 
among  the  first  of  the  Englishmen  to  apply  the  mathemati- 
cal method  to  economic  problems.  His  original  contribution 
consisted  m  the  use  of  diagrams  based  on  a  combination  of 
the  demand  curve  and  the  supply  curve.  He  concluded 
that  "  the  ratio  in  which  a  tax  on  commodities  falls  on 
sellers  and  buyers  is  simply  the  ratio  of  the  diminution  of 
price  obtained  by  the  sellers  to  the  increase  of  price  paid  by 
the  buyers."  ^  In  his  treatment  of  taxes  on  land  and  on 
houses,  however,  Jenkin  failed  to  make  the  qualifications 
which  alone  can  give  the  results  practically  true  in  every-day 
life.  Moreover,  he  neglected  other  taxes,  and  made  almost 
no  attempt  to  give  any  general  laws  of  incidence.  Jenkin's 
remarks  on  the  special  point  of  the  influence  of  taxes  on 
cost,  however,  are  suggestive,  and  will  be  considered  later. 

About  a  decade  later,  a  young  Italian  economist,  who  has 
since  become  well  and  favorably  known  to  English  readers, 
Professor  Pantaleoni,  devoted  a  whole  volume  to  the  study  of 
the  incidence  of  taxation.'^  He,  also,  was  ignorant  of  the 
work  of  Cournot,  but  attempted  to  base  his  theory  on  the 
doctrine  of  cost  of  production  worked  out  on  arithmetical 
lines.  Pantaleoni  devoted  over  half  of  his  work  to  what  is 
really  a  part  of  pure  economic  theory  —  the  doctrine  of  value 
■ —  and  then  proceeded  to  discuss  the  incidence  of  some  of 
the  chief  separate  taxes.  His  study  is  the  most  comprehen- 
sive one  yet  published  on  the  general  subject,  although  — 
strange  to  say  —  it  has,  until  very  recently,  received  no  con- 
sideration outside  of  Italy  itself.  While  there  is  a  great  deal 
of  acute  and  original  thought  in  the  monograph,  the  work 
suffers  from  the  fact  that  its  doctrine  of  incidence  is  largely 

^  Fleeming  Jenkin,  "  On  the  Principles  which  Regulate  the  Inciiience  of 
Taxes,"  in  Proceedings  of  the  Royal  Society  of  Edinburgh,  Session  1871-1872,  pp. 
618-631.  Cf  Grant's  Recess  Studies,  1870,  pp.  151-185,  for  his  "Supply  and 
Demand  schedule."  The  essay  on  taxation  was  reprinted  in  Papers,  Literary, 
Scientific,  i^c,  by  the  late  Fleeming  Jenkin.  Edited  by  Sidney  Colvin  and 
J.  A.  Ewing.     London,  1887,  ii,  pp.  107-122. 

"^  Teoria  della  Traslazione  dei  Tributi.  Definizione,  Dinamica  e  Ubiquity 
delta  Traslatione.     Da  Maffeo  Pantaleoni.     Rome,  1882. 


2o8  Shifting  and  Incidence  of  Taxation 

based  upon  economic  theories  which  are  open  to  question. 
Thus,  the  value  of  the  author's  treatment  of  the  tax  on 
profits  is  somewhat  impaired  by  the  dubious  doctrine  of 
profits  that  he  espouses.  Again,  his  treatment  of  the  land 
tax  and  of  the  house  tax  is  neither  exact  nor  correct.  It  may, 
in  fact,  be  affirmed  that  some  of  the  doctrines  upheld  in  the 
work  no  longer  represent  the  views  of  the  author.^  We  omit 
in  this  place  a  detailed  statement  of  the  special  doctrines,  as 
we  shall  have  occasion  to  revert  to  them  constantly  in  the 
following  pages.  Notwithstanding  some  imperfections,  Pro- 
fessor Pantaleoni's  work  contains,  on  the  whole,  the  best 
existing  treatment  of  the  incidence  of  taxation,  as  a  matter  of 
pure  theory. 

Comparatively  few  of  the  recent  continental  writers  belong- 
ing to  the  mathematical  school  have  attempted  to  make  any 
application  of  this  method  to  the  theory  of  the  incidence  of 
taxation.  As  regards  the  Austrian  writers,  who  have  devel- 
oped the  psychological,  rather  than  the  mathematical,  method 
in  economics,  and  who  have  applied  the  newer  theories  of 
value  to  various  problems  of  taxation,  neither  Menger,  Wieser, 
Bohm-Bawerk  nor  Sax  has  made  use  of  these  newer  theories 
to  explain  the  doctrines  of  incidence.  On  the  other  hand, 
Auspitz  and  Lieben  in  Austria,  and  Launhardt  in  Germany, 
apply  some  of  their  diagrams  of  the  supply  and  demand 
schedules  to  questions  of  taxation.^  Among  the  modern  con- 
tinental writers  of  the  mathematical  school,  however,  the 
French,  or  rather  Swiss,  economist  Walras  stands  preemi- 
nent. When  he  discusses  the  theory  of  taxes  on  monopolies, 
he  refers  to  the  works  of  Cournot  and  Dupuit,^    But  his  own 

^  In  answer  to  a  letter  from  the  present  writer  stating  that  he  did  not  agree 
with  several  of  the  doctrines  laid  down  in  the  work,  Professor  Pantaleoni  intimated 
that  his  present  views  differ  in  some  respects  from  those  expressed  in  the  book. 

*  Auspitz  und  Lieben,  Untersuchungen  iiber  die  Theorie  des  Preises,  1889; 
W.  Launhardt,  Mathematische  Begriindung  der  Volkswirthschaftslehre,  1885. 

^  Dupuit  was  one  of  the  first  to  attempt  to  illustrate  the  principles  of  marginal 
utility  and  of  monopoly  price  by  mathematical  methods.  See  his  articles  "  De 
la  mesure  de  I'utilite  des  travaux  publics,"  in  the  Annales  des  Fonts  et  Ckausees,  2d 
series,  vol.  viii,  1844;  and  "  De  I'influence  des  peages  sur  I'utilite  des  voies  de 
communication,"  Ibid.,  1849. 


The  Mathematical  Theory  209 

treatment  of  the  whole  subject  results  in  conclusions  that 
seem  a  little  too  simple.  According  to  Walras,  a  tax  on  land, 
owing  to  the  theory  of  the  rent  charge,  rests  only  on  the 
original  owners.  A  tax  on  wages  rests  on  the  wage-earner, 
because  the  theory  of  capitalization  is  not  applicable  here. 
A  tax  on  what  he  calls  artificial  capital  or  interest  is  nothing 
but  an  indirect  tax  on  consumption,  because  it  is  inevitably 
shifted.  Taxation  can  really  hit  only  "natural  wealth,"  that 
is,  either  agricultural  rent  or  wages.^  In  a  more  recent  work, 
Professor  Walras  recurs  to  his  general  theory  of  taxation,  but 
has  only  a  little  to  say  about  incidence,  further  than  to  point 
out  the  impossibility  of  the  equal-diffusion  theory.^ 

We  come  now  to  a  group  of  economists  who  have  ad- 
vanced some  new  views  during  the  past  few  years.  One 
of  the  most  original  of  these  recent  efforts  has  been  made  by 
an  acute  Swedish  writer  —  Knut  Wicksell.^  He  complains 
that  the  ordinary  theory  of  incidence  deals  only  with  the  rela- 
tions of  the  producer  to  the  consumer;  and  objects  that,  in 
the  many  cases  where  the  tax  is  supposed  to  rest  upon  the 
producer,  this  theory  does  not  go  far  enough,  since  produc- 
tion is  a  process  involving  the  cooperation  of  several  factors 
—  land,  labor  and  capital.  The  real  difficulty,  therefore,  says 
Dr.  Wicksell,  is  to  trace  the  effect  of  a  tax  on  these  various 
classes  of  society,  —  the  farmers,  the  capitalists  and  the 
laborers.  In  order  to  solve  this  problem,  he  accepts  the  the- 
ory of  Bohm-Bawerk  as  to  the  importance  of  the  comparative 
period  of  investment.*  This  theory,  as  is  well  known,  states 
that  the  longer  the  comparative  production-period  or  period 
of  investment  of  capital,  the  greater  its  productivity.  Since 
the  application   of  labor  amounts  to  a  lengthening  of  this 

^  Theorie  Critique  de  r Impbt.  Par  Leon  Walras.  Paris,  i86i,  pp.  31-57.  In 
his  Elements  d' 6,conomie  Politique  Pure,  M.  Walras  seems  to  have  altered  his 
opinion,  but  still  clings  to  the  rent-charge  theory.  See  the  3d  ed.,  1896,  pp. 
446-460. 

2  Etudes  d'iconomie  Sociale.     Par  Leon  Walras.      Paris,  1896,  p.  445. 

'  Finanztheoretische  Untersuchungen  nebst  Darstellung  und  Kritxk  des  Steuer- 
wesens  Schwedens.     Von  Knut  Wicksell.     Jena,  1896. 

♦  Ibid.,  p.  31. 


2IO  Shifting  and  Incidence  of  Taxation 

period  of  investment,  the  productivity  of  labor  will  increase 
with  the  extent  to  which  it  is  applied  in  long  periods  of  pro- 
duction. Starting  out  from  this  premise,  Dr.  Wicksell  seeks 
to  reconstruct  the  theory  of  incidence,  by  endeavoring  to 
measure  the  effects  of  a  tax  upon  the  elements  that  con- 
tribute to  a  lengthening  or  a  shortening  of  the  production 
period.^  His  conclusions,  however,  although  based  on  much 
keen  and  attractive  analysis,  are  vague.  In  order  to  simplify 
his  processes,  he  posits  all  kinds  of  hypotheses  which  are  not 
true  in  actual  life,  and  seeks  to  bolster  up  his  conclusions  by 
a  detailed  apparatus  of  mathematical  reasoning.  When  he 
comes  to  the  conditions  of  real  life,  the  complications  become 
so  great  that  his  preliminary  hypotheses  turn  out  to  be  of 
little  use,  and  the  conclusions  vanish.^  Nevertheless,  as  an 
intimation  of  the  kind  of  difficulties  that  beset  those  who 
attempt  to  trace  the  ultimate  effects  rather  than  the  imme- 
diate incidence  of  certain  kinds  of  taxes.  Dr.  Wicksell's  book 
is  worthy  of  study.  Whether  the  application  of  his  new 
principle  will  really  solve  any  present  problems  is  still  to  be 
ascertained. 

Among  the  most  recent  Italian  writers  of  the  mathematical 
school,  reference  may  be  made  to  Professor  Conigliani.  He 
devotes  himself  primarily  to  the  wider  subject  of  the  general 
effects  of  taxation.^  So  far  as  he  speaks  of  shifting  and  inci- 
dence, he  attempts  to  give  only  the  "  abstract,  general  the- 
ory," apart  from  its  application  to  any  existing  systems  of 
taxes,  and  apart  from  any  "exceptional,  transitory  or  irregu- 
lar "  phenomena.  The  result  of  such  a  method  of  study, 
based  on  the  recent  Austrian  theories  of  subjective  value,  is 

^  Finanztheoretische  Untersuchungen  nebst  Darstellung  und  Kritik  des  Steuer- 
wesens  Schwedens,  p.  37. 

^  Dr.  Wicksell  himself  states :  "  Dies  mag  nun  so  klingen  als  ob  die  praktische 
Losung  der  Frage  fiir  immer  unmoglich  sei."  He  thinks  that  an  escape  from  this 
conclusion  may  be  found  in  the  fact  that  we  really  need  only  an  approximate 
answer.  But  he  naively  adds :  "  Allerdings  fehlen  sogar  fiir  eine  solche  approxi- 
mative Losung  die  notigen  Data  so  gut  wie  vollstandig."  —  Ibid.,  p.  56. 

8  Teoria  generate  degli  Effetti  Economici  delle  Itnposte.  Saggio  di  Economic 
Pur  a.     Del  Dottor  Carlo  A.  Conigliani.     Milan,  1890. 


The  Mathematical  Theory  211 

partly  a  series  of  truisms  —  in  which  we  cannot,  even  with 
the  best  of  will,  discern  much  advance  in  theory  —  and  partly 
a  statement  of  tendencies  couched  in  such  general  terms  as 
to  be  of  little  use  in  the  elucidation  of  practical  problems. 
We  include  Conigliani  under  the  mathematical  school  only 
because  he  himself  professes  to  be  among  its  followers.  As 
an  example  of  his  method,  we  give  his  final  conclusion  :  "A 
tax  of  given  intensity  and  extension  falls  with  the  less  inten- 
sity and  extension  on  individual  economies,  and  produces  a 
less  unequal  effect  on  economic  society,  in  proportion  as 
society  is  more  developed.  The  incidence,  when  it  does  not 
have  a  considerable  extension  or  intensity,  assumes  the  less 
easily  the  character  of  a  change  in  activity,  in  proportion  as 
society  is  more  advanced.  Finally  the  change  in  consump- 
tion will  take  place  with  greater  disturbance  of  the  equilibrium 
in  the  degree  of  the  satisfaction  of  wants,  and  therefore  with 
less  change  in  the  internal  arrangement  of  individual  econ- 
omy, in  proportion  as  the  social  environment  in  which  these 
changes  of  taxation  take  place  is  more  advanced."  ^  And 
this,  Conigliani  tells  us,  "  completely  exhausts  the  general 
theoretic  problem  of  the  effects  of  taxation." 

It  is  only  fair  to  Professor  Conigliani  to  state  that  in 
another  more  recent  work  ^  he  has  shown  his  ability  to 
grapple  with  the  detailed  problems  of  shifting.  In  this 
admirable  book  —  which,  like  so  many  of  the  recent  works 
by  Italian  writers,  fairly  staggers  the  reader  with  its  wealth  of 
material  and  evidences  of  wide  reading  —  Professor  Conigli- 

^  "  Un'  imposta  di  data  intensitk  ed  estensione,  \  tanto  meno  intensamente  ed 
estesamente  incisa  su  alcune  economic,  e  lo  e  tanto  meno  disegualmente  sulla 
societk  economica  complessiva  quanto  piu  questa  e  evoluta.  L'  incidenza  poi, 
quando  essa  non  abbia  una  considerevole  estensione  ed  intensity,  assume  tanto 
meno  facilmente  il  carattere  di  un  mutamento  nell'  attiviti,  quanto  piu  la  society 
e  progredita.  Infine  il  mutamento  nel  consumo  si  avvera  con  tanto  maggiore 
violazione  dell'  equilibrio  dei  gradi  di  soddisfazione  dei  bisogni,  e  quindi  con  tanto 
minore  alterazione  dell'  ordinamento  interno  dell'  economia  individuate,  quanto 
pill  progredito  e  1'  ambiente  sociale,  in  cui  si  immagini  il  mutamento  di  imposta."  — 
Ibid.,  p.  276. 

*  La  Reforma  delU  Leggi  sui  Tributi  Locali.  Da  C.  A.  Conigliani.  Modena, 
1898,  751  pp. 


212  Shifting  a7id  Incidence  of  Taxation 

ani  comes  to  close  quarters  with  some  of  the  difficult  ques- 
tions of  incidence.  But  here  he  abandons  the  mathematical 
method,  and  treats  the  problem  very  much  from  the  same 
point  of  view  as  his  compatriot  Graziani.^  The  chief  Italian 
writer  to  follow  the  lead  of  Cournot  is  Major  Barone,  who 
substitutes  diagrams  for  algebraic  formulae.  He  has  pub- 
lished a  succinct  but  very  suggestive  essay  ^  on  some  funda- 
mental theorems  in  the  pure  theory  of  taxation,  working  out 
in  mathematical  form  some  of  the  points  referred  to  in  the 
following  pages. 

Among  recent  English  writers,  we  turn  naturally  to  the 
two  leaders  of  economic  thought,  Professors  Marshall  and 
Edgeworth.  The  former  has  called  attention  to  the  con- 
nection between  the  doctrine  of  incidence  and  the  general 
law  of  value.  Although  he  has  reserved  the  fuller  study  of 
the  shifting  of  taxation  for  the  second  volume  of  his  great 
work,  his  incidental  treatment  of  the  topic  has  already 
enriched  the  discussion  with  some  profound  remarks  and 
some  interesting  diagrams.^ 

Professor  Edgeworth  has  treated  the  general  subject  in  a 
series  of  recent  articles.*  He  discusses  the  abstract  theory 
with  all  the  force  of  reasoning,  the  nicety  of  distinction  and 
the  acuteness  of  criticism  to  which  the  readers  of  his  other 
works  have  become  accustomed.  His  presentation  discloses, 
perhaps  even  better  than  that  of  Cournot,  the  strong  —  and 
also  the  weak  —  points  of  the  mathematical  method.  While 
we  shall  often  have  occasion  to  refer  to  the  substance  of  Pro- 
fessor Edgeworth's  remarks  hereafter,  this  is  a  convenient 
place  to  say  a  word  about  the  mathematical  method  in  general. 

To  the  reader  who  understands  the  higher  mathematics, 

^  See  above,  p.  199, 

2  "  Di  alcuni  Teoremi  Fondamentali  per  la  Teoria  Matematica  dell'  Imposta." 
Da  Enrico  Barone.  In  the  GiornaU  degli  Economisti,  v  (1894),  pp.  201-210. 
See  also  his  "  La  Traslazione  delle  imposte"  in  "  Studi  di  economia  finanziaria," 
ibid.,  xlv  (191 2),  pp.  I  et  seq. 

^Principles  of  Economics.     5th  ed.,  1907,  book  v,  chaps,  xiii  and  xiv. 

*"The  Pure  Theory  of  Taxation."  In  Economic  Journal,  vii,  pp.  46-70, 
226-238.     Cf.  the  other  articles  mentioned  below  in  pt.  ii,  chaps,  iii  and  v. 


The  Mathematical  Theory  2 1 3 

the  hypothetical  principles  of  the  influence  of  tax  on  price 
can  be  illustrated  with  a  degree  of  refined  precision  that  is 
eminently  satisfactory.  But  this  advantage  is  occasionally 
secured  at  a  heavy  cost.  While  the  intricate  algebraic  for- 
mulae may  be  worked  out  with  perfect  exactitude,  the  slightest 
flaw  in  a  single  symbol  may  invalidate  the  whole  conclusion. 
Furthermore,  the  mathematical  study  of  the  pure  theory  often 
assumes  a  simplicity  of  condition  which  does  not  actually 
exist ;  it  purposely  neglects  the  all-important  element  of  fric- 
tion, and  constructs  hypotheses  irrespective  of  their  agree- 
ment with  the  facts  of  actual  life.  If,  as  sometimes  happens, 
these  hypothetical  results  are  applied  to  the  conditions  of  the 
market-place,  the  results  are  likely  to  be  unreal.  Within 
narrow  limits,  the  mathematical  treatment  of  incidence  is 
exceedingly  valuable,  but  except  where  diagrams  are  em- 
ployed, it  is  apt,  perhaps,  to  be  of  greater  value  to  the  writer 
himself  than  to  the  reader.  In  fact,  the  chief  advantage  of 
the  mathematical  method  is  seen  in  the  use  of  diagrams, 
where  an  intricate  point  which  involves  the  simultaneous 
consideration  of  several  causes  can  be  illustrated  with  greater 
brevity  and  clearness  than  in  any  other  way.  But  when  we 
proceed  from  diagrams  to  the  higher  algebra,  the  use  of  the 
mathematical  method  sometimes  leads  to  refined  calculations 
of  more  importance  to  the  mathematician  than  to  the  econo- 
mist, and  of  little  perceptible  use  in  solving  any  practical 
economic  problems.  It  may  even  be  doubted  whether  the 
mathematical  method  has  independently  discovered  any 
important  principle  susceptible  of  practical  application  that 
could  not  have  been  also  expressed  in  every-day  language. 
That  it  has  not  preserved  its  votaries  from  error  is  evident 
from  Cournot's  unhappy  treatment  of  the  mathematics  of 
international  value.  That  it  sometimes  leads  to  results  which 
are  likely  to  divorce  still  more  the  economics  of  the  closet 
from  the  economics  of  the  market-place  may  be  illustrated  by 
an  argument  of  Mr.  Edgeworth  himself.' 

'  See  the  extended  mathematical  proof  (in  the   Economic  Journal,  vii,  pp. 
230-232)  of  the  proposition  that  a  tax  on  first-class  railroad  tickets  may  reduce 


214  Shifting  aiid  Incidence  of  Taxation 

It  has  usually  happened,  however,  that  most  of  the  mathe- 
matical economists  have  been  at  the  same  time  distinguished 
thinkers,  who  have  been  able,  as  in  the  case  of  Professor 
Edgeworth,  not  so  much  because  of  their  mathematics  ^  as 
because  of  their  power  of  keen  analysis,  to  illumine  many  a 
dark  corner  of  pure  theory.  It  is  not  surprising,  then,  that 
to  the  mathematical  economists  we  owe  some  of  the  ablest 
contributions  to  the  subject  of  the  incidence  of  taxation. 

Our  long  and  tedious  task  has  come  to  a  close.  The  sub- 
ject of  the  incidence  of  taxation,  as  we  have  seen,  was  one  of 
the  earliest  to  engage  the  attention  of  writers  on  economic 
questions ;  and  because  of  its  difficulty,  as  well  as  of  its 
importance,  it  has  remained  a  favorite  topic  for  modern 
economists.  The  writers  prior  to  Adam  Smith,  with  a  few 
distinguished  exceptions,  considered  only  a  single  phase  of 
the  larger  problem,  and  attempted  to  connect  their  discussion 
with  some  pending  measures  of  actual  legislation.  The  his- 
tory of  their  views  is  of  interest  primarily  as  containing  the 
germs  of  future  doctrines.  Beginning,  however,  with  the 
Physiocrats  and  Adam  Smith,  we  meet  broader  principles 
based  on  fundamental  theories  of  the  new  economic  science. 
The  Physiocrats  spoiled  their  doctrine  of  incidence  by  accept- 
ing certain  peculiar  views  on  the  nature  of  wealth  and  the 

(not  increase)  the  price  of  the  tickets  oiall  classes.  The  mathematics  which  can 
show  that  the  result  of  a  tax  is  to  cheapen  the  untaxed  as  well  as  the  taxed  com- 
modities will  surely  be  a  grateful  boon  to  the  perplexed  and  weary  secretaries 
of  the  treasury  and  ministers  of  finance  throughout  the  world  ! 

^  The  average  man  will  agree  with  Jowett,  who  writes  to  a  correspondent :  "  I 
hope  that  you  will  not  .  .  .  write  anything  that  is  not  perfectly  intelligible  and 
which  cannot  be  expressed  in  words  without  symbols.  You  remember  that  I  was 
always  an  enemy  to  the  mathematical  formulae.  (You)  will  reply  that  I  do  not 
understand  them,  which  is  very  true.  But  ...  I  think  that  all  attempts  of  any 
kind  to  express  ideas  by  numbers  and  figures  have  failed  and  will  always  fail 
because  they  are  not  in  pari  materia  —  things  indefinite  cannot  be  measured  by 
things  definite,  though  they  may  be  sometimes  illustrated  by  them."  —  The  Life 
and  Letters  of  Benjamin  Jowett.  By  Abbott  and  Campbell.  1897,  "»  PP-  3'5'  3'^- 
For  the  other  view,  see  Edgeworth,  Mathematical  Physics,  1881;  and  the  same 
author's  address  "On  the  Application  of  Mathematics  to  Political  Economy,"  in 
\\\&  Journal  of  the  Royal  Statistical  Society,  lii,  part  i,  pp.  538-576. 


The  Mathematical  Theory  215 

principles  of  production.  Adam  Smith  and  Ricardo  here,  as 
almost  everywhere  else,  disclosed  the  real  starting-point  of 
the  inquiry,  and  gave  the  true  direction  to  future  investiga- 
tion. Their  doctrines  need,  indeed,  to  be  rounded  out,  and 
in  part  corrected ;  but  this  is  true  only  to  the  extent  that 
their  theories  of  economics  in  general  are  in  need  of  the 
revision  that  they  have  received  in  recent  times. 

The  acceptance  of  the  doctrines  of  Adam  Smith  and 
Ricardo  on  the  subject  of  incidence  was  retarded  by  two 
peculiar  theories  which  long  claimed  the  attention  of  stu- 
dents. The  equal-diffusion  theory,  as  we  have  seen,  was 
developed  primarily  by  French  writers,  although  it  soon 
spread  to  other  countries,  and  at  one  time  appeared  to  be 
in  almost  complete  possession  of  the  field.  It  owed  its 
popularity  chiefly  to  its  seeming  simplicity ;  and  it  was 
welcomed  by  the  conservatives  as  a  defence  of  the  existing 
social  order.  But  a  few  acute  thinkers,  as  we  now  know, 
recognized  that  the  theory  was  susceptible  of  a  pessimistic, 
as  well  as  of  an  optimistic,  interpretation ;  and  with  the  new 
weapon  of  attack  now  given  to  the  radicals,  the  popularity 
of  the  doctrine  waned.  Its  total  disappearance,  however, 
was  due  to  the  fact  that  the  essential  weakness  of  the 
premises  was  gradually  recognized.  The  other  doctrine 
which,  for  a  time,  engaged  attention  was  the  capitalization 
theory.  This  was,  however,  applied  primarily  to  the  consid- 
eration of  the  land  tax,  and  never  entirely  supplanted  the 
older  classical  theories  in  general. 

The  great  mass  of  writers  with  whose  views  we  have 
become  acquainted  continued  to  discuss  the  subject  in  a 
more  or  less  conventional  manner.  Some  of  them,  as  the 
members  of  the  eclectic  school,  made  certain  valuable  sug- 
gestions ;  and  we  can  notice  almost  from  decade  to  decade 
an  increase  in  the  breadth  of  view  and  in  the  attention  to 
points  neglected  by  their  predecessors.  But  the  new  theo- 
ries of  distribution  had  not  yet  been  worked  out,  and  the 
results,  therefore,  were  only  partly  satisfactory.  Two  minor 
theories  that  next  presented  themselves  were  the  rather  de- 


2i6  Shifting  and  Incidence  of  Taxation 

spairing  doctrine  of  those  who  regarded  the  problem  as  too 
intricate  for  any  satisfactory  solution,  and  the  more  self- 
satisfied  theory  of  those  reformers  who  considered  that  they 
had  discovered  the  real  social  bearing  of  the  doctrine  of 
incidence.  A  real  and  lasting  advance,  however,  was  made 
by  the  writers  who  addressed  themselves  primarily  to  the 
quantitative  relations  of  pure  theory  and  who,  in  part  at 
least,  based  their  conclusions  on  mathematical  processes. 
But  here  again  the  very  welcome  and  timely  insistence  on 
the  general  principles  of  pure  theory  was  attended  with  some 
drawbacks.  On  the  one  hand,  many  of  the  writers  seem  to 
have  considered  pure  theory  as  synonymous  with  the  theory 
of  normal  law  under  static  conditions  and  thus  neglected  the 
element  of  friction  or  the  working  out  of  economic  law  under 
dynamic  conditions.  In  the  second  place,  many  authors 
contented  themselves  with  stating  these  normal  laws  of  in- 
cidence in  general,  with  only  a  passing  illustration  here  and 
there.  Little  attempt  was  made  to  take  up  the  most  impor- 
tant existing  taxes  in  turn,  and  to  trace  their  incidence  in 
detail. 

There  still  remains,  then,  a  task  to  be  accomplished.  Not 
that  a  complete  revolution  or  reconstruction  of  the  doctrine 
of  shifting  is  necessary  or  possible.  Much  —  nay,  by  far 
the  greater  part  —  of  the  doctrine  has  come  down  to  us  in 
a  systematic  development  from  the  original  theories  of  the 
founders ;  but  here  and  there  excrescences  are  to  be  lopped 
off,  gaps  are  to  be  filled.  The  newer  theories  of  distribution 
require  in  part  a  recasting  of  the  doctrine  of  shifting ;  while 
a  due  regard  to  its  practical  importance  justifies  a  restate- 
ment of  the  whole  subject,  which,  while  by  no  means  in- 
attentive to  the  purely  theoretic  aspects  of  the  topic,  shall 
endeavor  continually  to  bear  in  mind  their  application  to  the 
problems  of  actual  life. 


PART    II 
THE   DOCTRINE   OF   INCIDENCE 


NOTE  TO  THE  FOURTH   EDITION 

Were  this  a  study  of  the  general  effects  of  taxation,  it  would  have  been  proper 
to  point  out  that  taxation,  like  other  things,  may  affect  the  general  level  of  prices 
and  engender  changes  in  capital  values.  The  chief  w^ay  in  which  this  is  accom- 
plished is  through  the  rate  of  interest,  for  capital  values  are  the  capitalization  of 
income  values  at  a  given  rate  of  interest.  If  a  tax  should  retard  accumulation, 
diminish  savings  or  investment,  or  deplete  the  fund  of  capital,  the  rate  of  interest 
will  rise  and  existing  securities  will  fall  in  value.  The  same  or  contrary  results 
would  ensue  according  as  the  taxes  are  spent  less  or  more  economically  than 
would  be  the  case  if  the  funds  were  left  in  private  hands.  Such  changes  in 
capital  value,  however,  are  the  results  of  a  more  or  less  slow  process,  to  be  distin- 
guished from  the  capitalization  and  amortization  discussed  in  pp.  174  and  221 
of  the  text.  The  first  writer  to  call  attention  to  this  aspect  of  the  effects  of 
taxation  on  changes  in  capital  values  was  Professor  Luigi  Einaudi  in  a  note  on 
pp.  287-289  of  vol.  43  (1912)  of  the  Memorie  della  Reali  Accademia  delle  Scienze 
di  Torino.  lA  1918  Professor  Benvenuto  Griziotti  published  in  the  GiornaU 
degli  Economisti  a  series  of  articles,  reprinted  as  Teoria  delP  ammortamento 
delle  imposte  e  sue  applicazioni ;  and  in  1919  Professor  Einaudi  printed  in  the 
Proceedings  of  the  Turin  Academy  a  fuller  study  of  the  subject,  republished  as 
Osservazioni  critiche  hitorno  alia  teoria  delV  ammortamento  deW  imposta  e  teoria 
delle  variazioni  nei  redditi  e  nei  valori  capitali  susseguenti  all '  imposta.  While 
Griziotti  includes  all  the  phenomena  under  the  head  of  amortization,  Einaudi 
concedes  (p.  61)  that  they  are  sufficiently  disparate  to  justify  the  retention  of  the 
terms  capitalization  and  amortization  for  the  classic  phenomenon.  He  suggests 
the  application  of  the  term  "  variations  ia  capital  values  "  to  the  other  set. 


218 


CHAPTER   I 
General  Principles 

The  problem  of  the  shifting  of  taxation  is  primarily  a 
question  of  prices.  To  solve  it  is  to  discover  whether,  and 
to  what  extent,  the  imposition  of  a  tax  effects  changes  in  the 
revenues  and  the  expenses  of  individuals ;  in  other  words,  to 
ascertain  which  of  the  two  parties  to  every  economic  trans- 
action—  the  buyer  and  the  seller  —  bears  the  burden  of  the 
tax.  This  is  obviously  not  the  same  as  saying  that  we  are 
dealing  only  with  the  relations  between  the  producer  and 
consumer.  The  vendor  may,  indeed,  be  a  producer ;  but  he 
may  also  be  an  owner  who  has  acquired  the  commodity  with- 
out producing  it.  Whatever  these  relations  may  be,  the 
essence  of  the  inquiry  is  :  Are  prices  raised,  and  if  so,  to 
what  extent  are  they  raised .-'  Whether  we  deal  with  the 
prices  of  consumable  commodities,  of  capital,  or  of  labor, 
this  is  always  the  nature  of  the  problem. 

It  is  readily  perceived,  therefore,  that  the  theory  of  the 
shifting  of  taxation  is  a  part  of  the  wider  theory  of  value,  and 
that  a  comprehension  of  the  facts  of  incidence  depends  on 
an  application  of  these  laws  of  value.  But  the  laws  of  value, 
as  is  now  well  recognized,  deal  primarily  with  the  more  or 
less  subtle  changes  caused  in  the  supply  of,  or  in  the  demand 
for,  commodities.  Even  the  cost  of  production,  which  plays 
so  fundamental  a  part  in  economic  progress,  affects  price 
through  the  medium  of  changes  in  the  relations  of  supply 
and  demand.  Our  concern,  then,  will  be  not  only  to  mention 
those  general  laws  of  value  which  are  of  especial  significance 
to  the  subject  under  discussion,  but  also  to  call  attention  to 
the  varying  conditions  under  which  these  laws  work  them- 

219 


2  20  Shifting  and  Incidence  of  Taxation 

selves  out.  In  other  words,  we  have  to  deal  not  alone  with 
the  "pure  theory,"  but  also  with  those  phenomena  of  friction 
which  impede  the  action  of  the  general  laws  and  are  of  funda- 
mental importance  in  any  application  of  the  doctrine  to  the 
affairs  of  real  life. 

If  we  take  the  simplest  case  of  a  tax  imposed  on  some 
commodity,  the  ordinary  result  may  be  pictured  somewhat 
as  follows  :  — 

The  tax  must  evidently  at  first  be  regarded  as  an  increase 
in  the  cost  of  production.  For  the  time  being,  and  until  the 
old  stock  is  exhausted,  those  who  produced  before  the  new 
tax  was  imposed  are  benefited  to  the  extent  of  the  ultimate 
rise  in  price.  But  as  soon  as  this  interval  has  elapsed,  all 
producers  are  on  the  same  footing.  Since  the  tax  is  an  addi- 
tion to  the  cost  of  producing  the  article,  they  will  seek  to 
recompense  themselves  by  raising  the  price.  Unless  they 
succeed  in  this,  their  profits  will  be  curtailed  and  the  pro- 
duction of  the  article  will  diminish.  For  one  of  two  results 
must  ensue :  either  producers  will  gradually  transfer  their 
capital  to  untaxed  industries,  or,  even  if  the  transfer  of 
capital  is  impossible  because  it  is  firmly  fixed  in  the  indus- 
try, production  will  be  curtailed  by  the  crowding  out  of  those 
who  were  previously  on  the  very  margin  of  profitable  pro- 
duction, while  the  tax  will  prevent  the  influx  of  any  new 
capital.  In  either  case,  then,  in  the  long  run,  the  supply 
will  decrease ;  and  this  diminution,  provided  the  commodity 
continue  to  be  produced  at  all,  will  involve  an  increase  of 
price.  The  consumer  will,  therefore,  bear  the  burden  of 
the  tax. 

This  seems  to  be  a  very  simple  process.  Not  a  few  have 
even  supposed  that  this  description  exhausts  the  study  of 
incidence.  The  dxtent,  however,  to  which  this  is  actually 
true,  and  therefore  the  extent  to  which  such  a  tax  will  be 
shifted  to  the  consumer,  depends  on  a  number  of  important 
considerations,  inattention  to  which  will  vitiate  not  only  any 
theoretical  conclusions  as  such,  but  also  their  application  to 
the  facts  of  every-day  life. 


General  Principles  221 

In  the  application  of  the  general  law  of  value  to  taxation 
the  chief  considerations  are  as  follows :  — 

1.  Is  the  commodity  durable  or  perishable  ? 

2.  Is  the  commodity  subject  to  the  law  of  monopoly  or 
that  of  competition  ? 

3.  Is  the  tax  general  or  exclusive  ? 

4.  Is  there  complete  mobility  of  capital  ? 

5.  Is  the  demand  for  the  commodity  elastic  ? 

6.  To  what  extent  do  differential  advantages  of  produc- 
tion affect  the  supply  ? 

7.  Is  the  article  supplied  at  a  constant,  an  increasing  or 
a  diminishing  cost  ? 

8.  Is  the  tax  imposed  on  margin  or  on  surplus  ? 

9.  Is  the  tax  large  or  small  ? 

10.  Is  the  tax  proportional  or  graduated? 

11.  Is  the  commodity  a  final  good  or  merely  an  inter- 
mediate good  ?  ^ 

I.    Is  the  Commodity  Durable  or  Perishable  f 

On  this  distinction  depend  the  phenomena  of  what  is  called 
the  capitalization  or  the  amortization  of  taxation. 

When  a  special  tax  is  imposed  on  any  one  class  of  com- 
modities to  the  exclusion  of  all  others,  the  tax  will,  under 
certain  conditions,  fall  entirely  on  the  original  owner  of  the 
commodity  —  that  is,  on  the  one  who  owned  it  before  the  tax 
was  imposed  —  and  not  on  the  future  purchaser;  for  the  tax 
will  be  discounted  through  a  depreciation  of  the  capital  value 
of  the  article  by  a  sum  equal  to  the  capitalized  value  of  the 
tax.  For  instance,  if  the  ordinary  return  on  investments  is 
five  per  cent,  and  if  a  tax  of  one  per  cent  is  imposed  on  all 
railway  bonds,  the  price  of  these  bonds  will  fall  from  par  to 
eighty.  The  new  purchaser  will  really  not  bear  the  weight 
of  the  tax ;  for  although  his  net  return  on  each  bond  of  a 
hundred  dollars  will  be  only  four  dollars,  he  will  still  make 

*  Cf.  Graziani  in  La  teoria  generate  delta  ripercussione  detle  imposte.  Naples, 
1899. 


22  2  Shifting  and  Incidence  of  Taxation 

five  per  cent  on  his  investment.  Four  per  cent  of  one  hun- 
dred is  the  same  as  five  per  cent  of  eighty.  In  the  same  way, 
when  unequal  taxes  are  levied  on  different  classes  of  com- 
modities, the  excess  of  the  tax  on  the  overtaxed  commodity 
above  the  general  rate  will  be  capitalized,  so  as  virtually  to 
exempt  future  owners  from  this  differential  burden.  The 
tax,  then,  will  fall  on  the  original  owner,  whose  property  will 
be  diminished  in  value  by  the  capitalized  equivalent  of  the 
excess  of  taxation.  On  the  contrary,  when  a  special  tax  is 
levied  on  such  commodities  at  a  lower  rate  than  that  already 
imposed  on  other  classes,  the  deficiency  in  the  tax  will  be 
capitalized  in  a  sum  which  will  be  added  to  the  value  of  the 
property  in  the  hands  of  the  original  owner.  To  use  our 
preceding  illustration,  let  it  be  assumed  that  all  railway  bonds 
are  taxed  one  per  cent  and  sell  at  eighty.  If  the  tax  on  the 
bonds  of  a  single  railway  company  is  for  some  reason  perma- 
nently reduced  to  one-half  of  one  per  cent,  these  particular 
bonds  will  rise  in  price  to  ninety.  In  this  case  the  original 
owner,  and  not  the  purchaser,  will  benefit  by  the  reduction 
or  the  remission  of  taxation,  just  as  in  the  preceding  case  the 
original  owner,  and  not  the  purchaser,  suffered  from  the  tax. 
Where  the  value  of  the  commodity  diminishes,  the  term 
"  amortization  of  taxation  "  seems  suitable ;  where  the  value 
of  the  commodity  increases,  the  phrase  "  capitalization  of  tax- 
ation "  is  preferable.  A  still  better  term  is  the  "  absorption" 
of  taxation,  the  tax  being  absorbed  in  the  lower  capital  value 
of  the  commodity. 

The  question  now  arises :  Under  what  conditions  will  this 
phenomenon  appear }  In  answering  this  question  due  im- 
portance must  be  assigned  to  the  following  considerations  :  — 

A.  The  tax  must  be  an  exclusive  or  an  unequal  tax. 

B.  The  tax  must  be  levied  on  a  commodity  which  has 
a  capital  value  and  is  capable  of  having  an  annual  rental 
value. 

C.  The  tax  must  be  levied  on  a  commodity  of  so  pro- 
tracted a  consumption  period  that  several  annual  payments 
are  expected  to  be  made. 

D.  The  tax  must  not  be  susceptible  of  being  shifted  to 


General  Principles  223 

the  consumer  by  the  fact  that  the  commodity  is  used  in  fur- 
ther production. 

In  the  first  place,  it  is  clearly  necessary  to  assume  in- 
equality of  taxation.  If  there  is  no  excess,  there  is  nothing  to 
be  capitalized.  The  theory  applies  only  to  taxes  which  are 
exclusive,  or  which  exceed  other  taxes  by  a  definite  amount. 
Inequality  of  taxation  is  the  corner-stone  of  capitalization. 

It  is  important,  however,  to  define  inequality.  Tax  capi- 
taUzation  is  a  part  of  the  general  process  of  capitalization 
which  operates  through  the  rate  of  interest.  Incomes  are 
always  capitalized  at  a  given  rate  of  interest,  i.e.,  the  flow  of 
wealth  becomes  a  fund  through  capitalization  at  a  definite 
rate.  Although  at  any  given  time  we  are  justified  in  speak- 
ing of  a  general  rate  of  interest,  different  capital  goods  are 
capitalized  at  different  interest  rates.  A  3  %  and  a  6  %  %  100 
bond,  for  instance,  may  both  sell  at  par.  The  3  %  may  be 
called  the  pure  interest ;  while  the  extra  3  %  in  the  6  %  bond, 
which  represents  risk  or  a  variety  of  other  considerations, 
may  be  called,  to  borrow  an  insurance  term,  the  loading. 
Equality  of  taxation  always  means  an  equal  burden  on  the 
pure  return.  In  the  case  mentioned  of  a  6  %  bond,  the  load- 
ing is  double  the  pure  interest.  An  income  tax  of  10  % 
would  reduce  the  return  of  the  6  %  bond  to  $  5.40,  taking 
30  ^  from  the  loading  and  30  ^  from  the  pure  interest,  which 
is  thus  reduced  to  $2.70.  Inasmuch  as  the  return  from  the 
3  %  bond  is  also  reduced  to  $  2.70,  there  will  be  no  change 
in  the  capital  value  of  either  security.  But  if  a  property  tax 
of  I  %  is  imposed  on  both,  causing  the  returns  to  fall  to  $  5 
and  $  2  respectively,  the  equality  in  the  pure  interest  rate  is 
impaired.  For  in  the  case  of  the  6  %  bond,  the  loading  and 
the  pure  interest  are  each  reduced  to  5  2.50,  whereas  in  the 
3  %  bond  the  pure  interest  is  reduced  to  %  2.  In  order  to 
make  the  burden  equal,  the  pure  interest  on  the  latter  bond 
ought  now  to  be  2\  %.  The  result  will  be  that,  if  the  6% 
bond  still  sells  at  par,  the  capital  value  of  the  3  %  bond  will 
fall  to  80,  for  only  in  this  way  will  the  $  2  represent  a  return 
of  2\  %  on  the  capital.     The  seemingly  equal  property  tax  is 


2  24  Shifting  and  Incidence  of  Taxation 

thus  really  an  unequal  income  tax,  and  it  still  remains  true 
that  it  is  the  inequality  of  taxation  which  causes  the  capitali- 
zation of  the  tax.^ 

Secondly,  the  commodity  must  have  a  capital  value  which 
is  susceptible  of  diminution.  This  would,  for  instance,  hold 
true  of  land ;  in  fact,  we  have  seen  that  the  whole  theory 
arose  from  a  consideration  of  the  land  tax.^  It  is  equally 
true,  however,  of  any  other  commodity  whose  market  value 
is  nothing  but  the  capitalized  rental  value,  the  capitalization 
being  fixed  at  so  many  years'  purchase.  But  the  principle 
cannot  apply  to  taxes  on  income  in  general,  or  to  taxes  on 
wages,  or  to  poll  taxes,  because  in  these,  and  in  all  similar 
cases,  there  is  no  capital  value  that  is  subject  to  amortization 
or  capitalization. 

Thirdly,  the  commodity  in  question  must  be  relatively  dura- 
ble in  character.  This  consideration  is  of  such  cardinal  impor- 
tance that  we  have  put  it  at  the  heading  of  this  whole  section. 
When  we  speak  of  a  tax,  we  may  mean  either  a  single  payment 
or  a  more  permanent  annual  payment.  If  the  tax  consists  of 
one  payment  only,  as  in  the  case  of  the  federal  so-called  direct 
tax  during  the  Civil  War,  there  is  no  opportunity  for  capitali- 
zation. Again,  if  the  commodity  is  of  so  ephemeral  a  nature 
that  it  will  be  consumed  before  the  tax  hits  it  a  second  time, 
there  can  obviously  be  no  capitalization.  This  is  the  case 
with  the  so-called  indirect  taxes  on  commodities.  If  a  tax  is 
imposed  on  a  barrel  of  flour,  it  will  ordinarily  be  shifted  to 
the  consumer.  But  if  the  commodity  is  so  durable  that  it 
may  be  subject  to  repeated  taxes,  and  if  the  taxes  are  levied 
at  about  the  same  rate  from  year  to  year,  the  anticipated 
annual  payments  may  be  lumped  together  in  such  a  way  as 
to  cause  a  change  in  the  capital  value  of  the  thing  taxed. 
If  the  commodity  yields  a  perpetual  rental  or  use  —  as  in  the 
case  of  a  piece  of  land  or  of  a  perpetual  bond  —  a  special 
tax  or  an  unequal  tax  on  this  land  or  bond  depreciates  its 

1  Professor  H.  G.  Hayes  fails  to  appreciate  this  in  his  suggestive  "  The  Cap- 
italization of  the  Land  Tax,"  Quarterly  Journal  of  Economics,  xxxiv  (1920),  377. 
^  As  to  its  application  to  agricultural  land,  see  infra,  pp.  269-270. 


General  Principles  225 

value  by  the  present  rate  of  a  perpetual  annuity.  The  more 
durable  the  commodity,  the  greater  the  chance  of  capitali- 
zation. 

Fourthly,  the  principle  will  not  apply  if  the  tax  is  imposed 
on  a  commodity  which  is  to  be  used  in  further  production, 
where  the  tax  will  simply  raise  the  price  of  the  product, 
instead  of  lessening  the  value  of  the  principal  or  source  of 
the  product.  Thus  an  exclusive  tax  on  iron  used  for  making 
tools  may  result  in  an  increased  price  of  iron  tools  and  may 
be  shifted  onward  to  the  consumer.  If  by  the  shifting  of  a  tax 
we  mean  its  transfer  forward  to  some  one  else,  capitalization 
is  the  opposite  of  shifting.  If  a  tax  is  shifted  onward,  it 
cannot  be  capitahzed ;  if  it  is  capitalized,  it  cannot  be  shifted 
onward.  Capitalization  implies  a  depreciation  of  the  capital 
value ;  and  this  is  possible  only  when  the  tax  rests  on  the 
initial  possessor  —  that  is,  when  it  is  not  shifted  onward  to 
any  one  else. 

On  the  other  hand,  if  we  extend  our  conception  of  shifting 
to  include  the  process  of  shifting  backward,  as  well  as  that 
of  shifting  forward,  we  might  call  capitalization  a  kind  of 
shifting.  For,  as  we  have  just  seen,  the  new  purchaser  who 
continues  to  pay  the  tax  from  year  to  year  does  not  bear  it, 
but  in  one  sense  shifts  it  back  upon  the  initial  possessor. 
He  pays  the  tax  indeed ;  but  he  has  already  deducted  from 
the  purchase  price  a  sum  equal  to  all  the  future  taxes  which 
he  expects  to  be  called  upon  to  pay.  The  difference  between 
his  case,  however,  and  that  of  a  dealer  who  shifts  a  tax  on 
commodities  back  to  the  producer  is  that,  in  the  latter  case, 
the  tax  is  levied  only  once  on  a  commodity  destined  to  im- 
mediate consumption,  while  in  the  former  case  a  whole  series 
of  payments  is  levied  on  a  durable  commodity.  In  the  one 
case  we  have  the  shifting  back  of  a  single  tax ;  in  the  other 
case  we  have  the  throwing  back  at  once  of  a  whole  series  of 
taxes.  For  capitalization  implies  a  change  in  price  equal 
to  the  capital  value  of  all  anticipated  payments.  Hence  capi- 
talization is  properly  differentiated  from  shifting. 

With  all  these  qualifications,  the   absorption   of   taxation 


2  26  Shifting  and  Incidence  of  Taxation 

remains  an  important  topic  in  the  study  of  incidence.      Its 
cause  is  inequality  ;  its  result  is  confiscation  or  gratuity. 


2.    Is  the  Commodity  subject  to  the  latv  of  Monopoly  or  to 
the  Law  of  Competition  ? 

From  the  point  of  view  of  pure  theory,  this  distinction  is 
vital ;  indeed,  the  most  recent  formulation  of  the  law  of  value 
makes  a  sharp  line  of  demarcation  between  the  regime  of 
monopoly  and  that  of  competition.  In  the  domain  of  prac- 
tical life,  also,  the  distinction  is  of  great  importance,  for  the 
number  of  commodities  subject  to  the  regime  of  monopoly 
in  modern  times  is  great  and  growing.  It  is,  indeed,  true  that 
the  cases  of  a  natural  monopoly  are  perhaps  not  more  numer- 
ous in  modern  times.  Not  only,  however,  do  we  find  more 
and  more  legal  monopolies,  through  the  protection  of  indus- 
tries by  patents  and  copyrights,  but  it  is  a  familiar  fact  that 
there  has  been  a  great  increase  in  the  number  and  signifi- 
cance of  the  so-called  economic  monopolies,  —  those  indus- 
tries where  through  the  working  out  of  economic  law  the 
tendency  is  toward  an  ever  greater  concentration  of  capital, 
gradually  shutting  out  the  existence  of  competition,  until 
finally  we  reach  the  stage  of  complete  monopoly.  The 
familiar  examples  of  this  are,  first,  the  so-called  municipal 
monopolies,  —  gas,  water,  electric  light,  street  railway  busi- 
ness ;  secondly,  occupations  like  the  railroad  and  express, 
the  telegraph,  the  telephone ;  and  thirdly,  the  host  of  modern 
enterprises  which  are  assuming  the  form  of  trusts. 

The  fundamental  difference  between  the  regime  of  monop- 
oly and  that  of  competition  is,  that  in  the  former  case  price 
is  not  fixed  at  the  cost  of  any  marginal  product.  The  impor- 
tant consideration  here  is  that  a  monopolist  fixes  the  price  at 
the  point  that  will  yield  the  largest  net  return,  and  that  he 
will  limit  the  production  to  such  an  amount  as  will  afford 
him  this  maximum  monopoly  revenue.  He  differs  from  the 
producer  under  competitive  conditions  in  that  he  controls 
the  supply.     From  this  fact  result  such  important  differences 


General  Principles  227 

in  the  law  of  shifting  that  in  many  of  the  succeeding  state- 
ments of  principle  it  will  be  necessary  to  distinguish  between 
the  conditions  of  monopoly  and  those  of  competition. 

3.    Is  the   Tax  General  or  Exelusivc  ? 

In  almost  all  the  writings  on  incidence,  the  particular  tax 
under  discussion  is  assumed  to  be  special  or  exclusive.  For 
purposes  of  pure  theory,  this  assumption  is  legitimate,  nay 
even  necessary ;  for  it  is  only  through  isolation  that  we  can 
get  a  clear  picture  of  the  working  of  any  single  force.  But 
it  has  not  infrequently  happened  that  results,  laboriously 
attained  as  hypothetically  true,  have  been  at  once  applied 
to  conditions  under  which  the  hypothesis  is  no  longer  valid. 
We  may,  for  example,  study  the  effects  of  a  particular  tax, 
like  that  on  houses,  and  reach  conclusions  which  arc  correct 
on  the  assumption  that  the  tax  is  the  only  one  ;  but  in  actual 
life,  the  house  tax  may  be  only  one  of  a  series  of  taxes,  and 
this  fact  may  at  once  invalidate  our  nicely  calculated  results. 
Other  things  being  equal,  the  more  general  a  tax,  the  narrower 
the  taxless  field  to  which  the  persons  concerned  can  migrate ; 
the  less  general  the  tax,  the  greater  the  chance  that  the  tax 
will  be  shifted. 

4.    Is  there  Complete  Mobility  of  Capital? 

The  ordinary  theory  is  that  when  capital  does  not  find  its 
usual  remuneration  in  one  occupation,  it  will  be  transferred 
to  another  industry  where  the  chances  are  better.  In  general, 
this  hypothesis  is  valid,  because  it  is  based  on  the  principle 
of  least  effort.  The  'economic  man  may  be  assumed  to 
endeavor  to  secure  the  greatest  returns  with  the  smallest 
outlay.  He  will  transfer  his  capital  from  place  to  place,  or 
from  occupation  to  occupation,  according  to  his  opinion  of 
the  chances  of  profit. 

At  the  same  time,  there  may  be  obstacles  to  immediate 
transfer.  Thus,  where  capital  is  firmly  fixed,  the  owner  may 
lose  more  by  attempting  to  change  it  than  he  would  gain  by 


2  28  Shifting  and  Incidence  of  Taxation 

the  transfer.  If  the  capital  is  unremuneratively  invested  in 
a  given  industry,  there  will  be  no  fresh  accessions  of  capital 
to  it ;  and,  as  the  other  industries  prosper,  the  relative  dimi- 
nution of  capital  in  the  first  industry  will,  in  the  long  run,  be 
equivalent  to  a  transfer  of  capital  from  it  to  the  more  pros- 
perous occupation.  But,  in  any  given  business,  at  any  given 
moment,  there  may  be  all  degrees  in  the  rate  of  transfer,  in 
the  degree  of  mobility.  At  the  one  extreme  lies  the  stock 
exchange  business,  where  the  mobility  is  almost  complete; 
at  the  other  lie  those  forms  of  agriculture  in  which  capital 
devoted  to  improvements  is  almost  entirely  irremovable. 

In  addition  to  this  cause  of  comparative  immobility,  we 
may  mention  minor  reasons,  such  as  the  ignorance  of  the 
capitalist,  the  risk  connected  with  the  transfer,  social  con- 
siderations and  legal  obstacles.^  Whatever  the  reasons,  it  is 
obvious  that  when  a  tax  is  imposed  on  capital  in  any  industry, 
the  smaller  the  degree  of  mobility,  the  less  is  the  prospect  of 
shifting,  and  the  slower  will  be  the  process. 

5.    Is  the  Demand  for  the  Commodity  Elastic? 

In  the  general  proposition  laid  down  above,^  no  reference 
was  made  to  the  conditions  of  the  demand :  it  was  assumed 
that  demand  would  remain  constant.  But  this  assumption 
is  obviously  not  the  only  possible  one.  In  order  fully  to 
consider  the  changes  in  price  caused  by  a  tax,  we  must 
therefore  regard  the  situation  more  closely  from  the  point  of 
view  of  the  effective  demand. 

We  speak  of  the  demand  for  a  commodity  as  elastic,  when 
a  change  in  price  produces  an  alteration  in  demand.  In  such 
a  case  if  the  price  goes  up,  the  demand  falls  off ;  if  the  price 
goes  down,  the  demand  increases.  There  are  as  many 
degrees  of  elasticity  in  the  demand  for  various  commodities 
as  there  are  variations  in  human  wants  and  in  the  ability 
of  men  to  satisfy  those  wants.     On  the  other  hand,  if  the 

'  See  below,  chap,  iv,  B,  §  2.  Professor  Marshall  generalizes  the  conception 
in  the  statement  that  all  depends  on  "  the  fluidity,  the  viscosity,  or  the  rigidity 
of  the  general  elements."     Industry  and  Trade,  1919,  p.  411.  2  p^  230. 


General  Principles  229 

demand  for  a  commodity  is  not  variable,  the  inelasticity  may 
assume  two  forms.  The  demand  may  be  inelastic  in  the 
sense  of  being  constant,  so  that  it  always  remains  the  same ; 
or  it  may  be  inelastic  in  the  sense  that  any  attempted  increase 
completely  destroys  the  demand.  We  shall  thus  have  to 
consider  three  possible  cases,  taking  up  first,  under  the  heads 
A  and  B,  the  two  forms  of  inelastic  demand. 

A.  If  the  tax  is  levied  on  a  commodity  which  the  con- 
sumers must  have  and  which  they  are  willing  to  pay  for  at 
any  expense,  the  demand  will  not  decrease.  With  such  an 
invariable  demand  the  price  of  the  commodity  will  rise  by 
just  the  amount  of  the  tax.  The  consumer  will  thus  bear  the 
whole  burden.  Practically,  this  is  true  of  only  a  few  com- 
modities. In  a  large  number  of  instances,  however,  prices 
may  rise  considerably  without  greatly  affecting  the  demand. 
Such  would  be  the  case  to  some  extent,  at  least,  with  absolute 
necessaries  as  well  as  with  high-priced  luxuries.  The  demand 
for  the  former,  is  not  apt  greatly  to  diminish  unless  people 
starve.  The  effect  of  a  tax  on  such  commodities  would  rather 
cause  a  diminution  in  the  more  elastic  demand  for  comforts, 
or  in  that  for  the  less  absolute  necessaries.  But  the  demand 
for  absolute  necessaries  depends  chiefly  on  the  size  of  the 
population,  not  on  the  price  of  the  article.  In  the  class  of 
high-priced  luxuries,  again,  a  tax,  unless  it  be  utterly  exorbi- 
tant, is  not  likely  to  restrict  consumption  to  any  very  great 
degree.  Those  who  are  generally  willing  to  buy  such  luxu- 
ries are  not  quite  so  likely  to  be  held  back  by  any  probable 
increase  of  price  as  the  purchasers  with  a  slightly  lower 
standard  of  life.  Of  course,  a  decided  decrease  in  the  price 
of  luxuries  will  have  the  effect  of  virtually  removing  them 
from  the  category  of  luxuries  and  putting  them  into  that  of 
comforts.  But  as  long  as  the  price  remains  so  high  as  to 
constitute  them  real  luxuries,  the  demand  becomes  relatively 
inelastic.  It  may,  in  fact,  be  laid  down  as  a  general  rule  that 
in  the  case  of  necessaries,  as  well  as  in  that  of  expensive 
luxuries,  great  alterations  of  price  go  hand  in  hand  with  slight 
variations  in  demand ;  while  in  the  case  of  moderate  comforts, 


230  Shifting  and  Incidejice  of  Taxation 

small  changes  of  price  are  accompanied  by  considerable  vari- 
ation in  demand.^  In  the  former  case,  then,  that  of  absolute 
necessaries  and  some  expensive  luxuries,  under  the  imposition 
of  exclusive  taxes  there  will  be  less  migration  of  capital  from 
the  industries  concerned  because  profits  tend  to  remain  con- 
stant. The  tax  will,  in  the  extreme  case,  be  shifted  in  its 
entirety  to  the  consumer.^ 

What  is  only  partly  true,  however,  in  actual  life,  of  abso- 
lute necessaries  and  expensive  luxuries,  applies  in  a  far 
greater  degree  to  what  are  called  complementary  goods.  For 
even  in  the  case  of  luxuries  there  are  generally  some  pur- 
chasers at  the  margin  of  doubt,  who  will  be  dissuaded  from 
buying,  and  who  will  be  tempted  to  substitute  some  other 
commodity  if  the  price  of  the  article  rises.  When,  however, 
as  frequently  happens  in  industrial  enterprises,  we  have  two 
or  more  commodities  which  have  to  be  joined  in  production 
to  accomplish  a  desired  result,  the  one  supplements  the 
other,  and  cannot  be  disused  without  serious  loss.  Familiar 
illustrations  of  such  complementary  goods  are  pen,  ink  and 
paper  ;  needle  and  thread  ;  cart  and  horse ;  bow  and  arrow.^ 
Almost  every  industry  on  a  large  scale  has  its  gradations  of 

^  Most  writers,  like  Walras,  Elements  d'' Economic  Politique  Pure,  2d  ed., 
p.  519,  fail  to  make  this  distinction,  and  contrast  luxuries  in  general  with  necessi- 
ties in  general.  Yet  Cournot  had  already  called  attention  to  the  similarity  be- 
tween great  luxuries  and  indispensable  necessaries  in  his  Principes  Mathematiques, 
pp.  1 52,  163,  and  in  his  Principes  de  la  Theorie  des  Richesses,  p.  306.  Cf.  on  the 
whole  subject  of  the  elasticity  of  demand  as  between  luxuries  and  comforts  Ru- 
dolph Auspitz  and  Richard  Lieben,  Untersuchungen  iiber  die  Theorie  des  Preises, 
1889,  pp.  44-53.  The  influence  of  taxation  is  discussed  on  pp.  68-73.  Cf.  also 
Marshall,  Principles  of  Economics,  5th  ed.,  1907,  book  iii,  chap.  iv. 

■■^  Pantaleoni,  Traslazione,  pp.  115,  116,  asserts  that  when  the  Hmit  of  effective 
demand  has  not  been  reached  the  tax  will  be  divided  between  the  producer  and 
the  consumer.  His  argument  is  that,  since  the  producer's  profits  are  decreased, 
he  will  transfer  his  capital  to  other  industries.  This  great  addition  of  capital  will 
decrease  profits  all  around,  in  the  taxed  as  well  as  in  the  untaxed  industries. 
Thus,  the  producer  will  get  less  profit  than  before. 

This  seems  to  be  a  mistake.  It  is,  on  the  contrary,  difficult  to  see  why  any 
capital  should  be  transferred.  So  long  as  the  limit  of  effective  demand  is  not 
reached,  the  producers  will  not  have  their  profits  curtailed,  because  they  can  in- 
crease the  price  by  the  tax. 

^  Cf.  The  Positive  Theory  of  Capital,  by  E.  von  Bohm-Bawerk,  book  iii,  chap.  ix. 


General  Principles  231 

such  complementary  goods.  Even  here,  of  course,  there  is 
no  insuperable  bar  to  the  use  of  substitutes.  But  the  price 
of  the  complementary  goods  must  rise  far  higher  than  would 
be  the  case  with  an  ordinary  commodity,  before  the  pur- 
chaser will  be  driven  to  accept  a  substitute.  Where  a  tax  is 
imposed  on  only  one  of  two  or  more  complementary  goods, 
we  approach  the  conditions  of  inelastic  demand.  A  tax  on 
one  of  two  complementary  goods,  for  which  substitutes  are 
found  with  difficulty,  will  thus  tend  to  be  shifted  to  a  greater 
degree  to  the  consumer. 

It  is  interesting  to  observe  that  a  tax  on  one  of  the  comple- 
mentary commodities  which  will  raise  its  price  tends  to  lower 
the  price  of  the  other  commodity.  If  a  tax  is  imposed  on 
commodity  A,  which  acts  as  a  substitute  or  rival  for  commod- 
ity B,  thus  raising  its  price  and  diminishing  its  consumption, 
some  of  the  demand  previously  satisfied  by  A  is  now  trans- 
ferred to  B,  and  this  augmented  demand  for  B  tends  to  raise 
its  price,  although  by  much  less  than  the  increase  vcs.  A.  A 
tax  imposed  on  A  thus  raises  the  price  of  both  A  and  B  — 
that  of  A  by  less  than  the  tax  and  that  of  B  by  less  than  the 
increase  in  the  price  of  A.  If,  however,  A  and  B  are  com- 
plementary commodities  when  the  demand  is  so  correlated 
that  they  must  be  used  conjointly,  the  increased  price  of  A 
consequent  upon  the  tax  will  not  lead  to  any  increase  in 
the  demand  for  B  nor  therefore  to  any  rise  in  its  price.  On 
the  contrary,  to  the  extent  that  the  demand  for  A  is  dimin- 
ished at  all  by  the  increase  of  price,  the  lesser  demand  will 
transfer  itself  to  B,  and  since  the  lesser  demand  for  B  is  not 
counterbalanced  by  a  tax,  the  price  of  B  will  fall.  Thus 
while  a  tax  on  one  of  two  rival  commodities  will  increase  the 
price  of  both,  a  tax  on  one  of  two  complementary  commodities 
is  apt  to  increase  the  price  of  the  taxed  commodity  and  to 
lower  that  of  the  untaxed  commodity.^ 

^  Professor  Edgeworth  distinguishes,  in  the  Economic  Journal,  vii,  p.  54,  not 
only  between  rival  and  complementary  commodities,  as  in  the  text,  but  between 
what  he  calls  rival  and  complementary  products,  meaning  by  this  the  case  of  joint 
products  where  the  goods  are  joined  in  supply,  rather   than  in  demand.    The 


232  Shifting  and  Incidence  of  Taxation 

B.  We  take  up  next  the  other  case  of  an  inelastic  demand, 
that,  namely,  where  the  price  of  a  commodity  before  the 
imposition  of  a  tax  has  already  reached  the  limit  of  the  effec- 
tive demand,  and  where  an  attempt  to  increase  the  price  by 
any  portion  of  the  tax  would  totally  annihilate  the  demand. 
Although  such  cases  are  exceedingly  rare  in  practical  life, 
and  represent  a  theoretical  possibility  rather  than  an  actual 
fact,  they  deserve  at  least  a  passing  mention.  The  commod- 
ity must  be  sold  at  the  accustomed  price,  or  not  at  all ;  the 
price  cannot  rise.  In  such  a  case  the  tax  cannot  be  shifted : 
the  whole  weight  of  the  tax  will  fall  on  the  producer.  This 
will,  in  the  long  run,  involve  a  decrease  in  production.  The 
old  producers  will  lose,  and  no  new  capital  will  be  invested. 
Even  if  the  supply  is  diminished,  however,  the  price  cannot 
increase ;  for,  by  the  supposition,  consumers  will  prefer  to 
forego  consumption  rather  than  pay  a  higher  price.  The 
net  result  will  be  a  cessation  of  production  with  an  interme- 
diate loss  to  the  owners  of  fixed  capital  in  the  business. 
Under  no  circumstances  can  such  a  tax  be  shifted. 

C.  If,  thirdly,  the  demand  is  elastic,  as  in  the  case  of 
minor  luxuries  and  of  all  comforts,  —  that  is,  of  the  general 
mass  of  commodities, — in  the  sense  that  the  old  price 
before  the  imposition  of  the  tax  falls  below  what  some  of  the 
consumers  will  in  an  extremity  be  willing  to  pay,  while  the 
new  price,  including  the  tax,  exceeds  what  a  part  of  the  con- 
sumers can  afford  to  pay,  the  tax  will  be  divided  between 
the  consumer  and  the  producer.  The  proportions  in  which 
this  division  will  take  place  will  depend,  so  far  as  this  ele- 
ment is  concerned,  chiefly  on  the  elasticity  of  the  demand. 
The  more  persistent  the  demand,  the  greater  is  the  propor- 
tion of  the  tax  which  the  producer  will  be  able  to  add  to  the 
price ;  the  more  sensitive  the  demand,  the  smaller  the  sum 
by  which  he  will  find  it  profitable  to  increase  the  price.  In 
other  words,  the  greater  the  elasticity  of   the  demand,  the 

nomenclature  is  not  a  very  happy  one,  for  it  implies  that  a  product  is  something 
distinct  from  a  commodity.  See  also  the  criticism  in  Jannacone,  L'Imposia  sul 
Trasporto  degli  Etnigranti  e  la  sua  Incidenza,  1908,  p.  25,  note. 


General  Principles  233 

more  favorable  —  other  things  being  equal  —  will  be  the  situa- 
tion of  the  consumer. 

All  changes  in  price,  however,  depend  ultimately  on  the 
relations  between  demand  and  supply.  Having  just  dis- 
cussed the  variations  due  to  the  elasticity  of  demand,  what 
shall  we  say  about  those  due  to  the  elasticity  of  the  supply  .■' 

At  the  very  outset,  we  may  mention  those  comparatively 
insignificant  cases  in  which  no  increase  of  the  supply  is  pos- 
sible. This  would  be  true  of  old  works  of  art,  of  choice 
wines  of  a  particular  vintage  and  of  similar  articles.  No 
matter  what  the  inducement  may  be,  the  supply  is  inelastic, 
since  it  cannot  respond  to  any  increase  in  the  demand. 
Under  such  circumstances,  the  extent  to  which  the  tax  will 
be  shifted  to  the  consumer  will  depend  on  the  conditions 
mentioned  above  under  A  and  C. 

In  ordinary  cases,  however,  the  supply  possesses  some 
degree  of  elasticity ;  but  the  conditions  affecting  elasticity 
of  supply  are  somewhat  more  complicated  than  those  affect- 
ing elasticity  of  demand.  It  may,  however,  be  laid  down  as 
a  general  rule  that  the  elasticity  of  supply  depends  on  two 
considerations :  first,  the  extent  to  which  differential  advan- 
tages of  production  affect  the  supply  of  the  commodity ;  and 
secondly,  the  ratio  of  product  to  cost,  or  the  law  of  return  to 
which  the  industry  is  subject.  When  it  is  said  that  the 
elasticity  of  supply  "  depends  on  "  these  considerations,  no 
attempt  is  made  to  prejudge  the  question  whether  it  varies 
directly  or  inversely  with  these  conditions.  It  is  this  prob- 
lem to  which  we  shall  now  address  ourselves  under  the  sixth 
and  seventh  heads  of  this  chapter. 

6.    To  what  Extent  do  Differential  Advantages  of  Production 
affect  the  Supply  f 

The  distinction  here  drawn  is  between  those  cases  where 
all  portions  of  the  supply  of  a  given  commodity  are  pro- 
duced at  practically  the  same  cost,  and  those  cases  where  a 


2  34  Shifting  and  Incidence  of  Taxatiojt 

part  of  the  supply  is  produced  at  a  certain  cost,  and  another 
part  at  a  different  cost.  The  nature  of  this  distinction 
demands  attention  before  we  proceed  to  the  discussion  of 
incidence. 

Ordinarily  producers  differ  either  in  ability  or  in  oppor- 
tunity. While  all  similar  units  in  the  supply  of  a  given 
commodity  sell  at  the  same  price,  the  superior  skill  of  some 
employers,  or  the  more  favorable  situation  of  some  factories, 
or  the  more  fortunate  combination  of  external  causes,  enables 
some  capitalists  to  produce  more  cheaply  than  others.  If, 
now,  we  assume  static  conditions ;  if,  in  other  words,  we 
assume  that  both  demand  and  supply  remain  stationary,  that 
there  is  no  change  in  population,  and  no  alteration  in  the 
methods  of  industry,  —  under  such  conditions  it  is  clear  that 
the  normal  value  of  the  articles  will  be  fixed,  not  at  the 
average  cost  of  production,  but  at  the  cost  of  producing 
the  most  expensive  unit.  In  other  words,  normal  value  will 
then  tend  to  equal  the  highest  cost  of  production.  So  long 
as  the  demand  is  sufTlicient  to  call  into  existence  commodities 
produced  at  different  costs,  and  so  long  as  there  is  no  altera- 
tion in  relative  supply  and  demand,  the  price  will  be  fixed  at 
the  greatest  cost ;  and  those  who  produce  more  cheaply  will 
benefit  accordingly.  As  the  price  is  fixed  at  the  cost  of 
producing  the  most  expensive  portion  of  the  supply,  the 
difference  between  the  lowest  cost  and  actual  price,  in  any 
given  case,  —  that  is,  the  difference  between  the  cost  of  pro- 
ducing the  article  under  the  most  disadvantageous  circum- 
stances and  that  of  producing  it  under  the  more  favorable 
conditions, — constitutes  the  producer's  surplus  or  profits. 

Under  conditions  of  actual  life,  however,  this  assumption 
is  inadmissible.  The  real  conditions  are  dynamic,  not  static. 
There  is  a  continual  movement  going  on,  not  only  from  the 
side  of  demand,  through  changes  in  the  population  as  well 
as  in  the  wants  of  the  purchasers,  but  also  from  the  side 
of  supply,  through  alterations  in  industry.  Under  such 
changing  conditions  of  actual  life,  the  conditions  are  some- 
what more  complex. 


General  Principles  235 

The  ordinary  course  of  competitive  industry  may  be  por- 
trayed as  follows.  At  any  given  moment,  the  commodity  is 
supplied  by  a  number  of  producers,  and  sells  in  the  market 
at  a  fixed  price.  The  more  efficient  producer,  or  perhaps 
some  newcomer  in  the  field  with  more  capital  or  with  im- 
proved machines  or  with  better  facilities  for  marketing  the 
product,  endeavors  to  capture  a  larger  part  of  the  market  by 
putting  out  an  increased  supply  at  a  somewhat  lower  cost  of 
production.  The  mere  fact  of  this  increase  of  supply  will 
tend  to  depress  the  price ;  and  although  his  percentage  of 
profit  may  be  smaller  than  it  would  have  been  at  the  old 
price,  he  expects  larger  total  profits  because  of  his  ability  to 
sell  more  than  before.  The  increase  of  supply,  at  lower 
price,  must  manifestly  injure  the  less  efficient  producer  at 
the  margin  of  profitable  production.  In  every  business, 
there  are  always  some  producers  who  are  able  just  to  "make 
both  ends  meet."  Their  machinery  is  antiquated,  their  capi- 
tal has  been  depleted,  their  business  activity  and  knowledge 
are  no  longer  what  they  should  be,  and  their  former  profits, 
if  there  ever  were  any,  have  now  vanished.  They  may  con- 
tinue for  a  time  to  struggle  along,  hoping  against  hope,  and 
may  live  on  their  capital,  being  content  to  bridge  over  the 
next  few  years  without  profit ;  or,  if  they  have  invested 
heavily  in  unsalable  buildings  and  machinery,  they  may 
deceive  themselves  by  a  fallacious  system  of  book-keeping, 
and  through  a  neglect  to  charge  up  the  items  of  depreciation 
of  stock  or  machinery,  may  figure  out  a  nominal  profit ;  or, 
finally,  if  their  buildings  occupy  a  good  site,  they  may  count 
as  profit  what  is  really  to  be  apportioned  to  rent,  and  their 
gains  will  accordingly  accrue  to  them  not  as  entrepreneurs, 
but  as  landowners.  But  in  every  case  the  day  of  reckoning 
is  sure  to  come.  Sooner  or  later  the  producer  will  find  that 
he  is  getting  no  return  on  his  industrial  capital.  He  will 
cease  producing  that  particular  commodity ;  and  his  place 
will  be  taken  by  some  more  efficient  entrepreneur. 

All  industrial  progress  consists  of  a  continual  change  at 
the  top  and  at  the  bottom  of  the  line  of  producers.     Fresh 


236  Shifting  and  Incidence  of  Taxation 

capital  is  continually  coming  in ;  the  discouraged  are  con- 
tinually stepping  out.  Normal  value,  under  dynamic  condi- 
tions, therefore  tends  in  the  direction  of  cost  of  production 
under  the  most  favorable,  not  under  the  least  favorable,  con- 
ditions ;  it  tends  towards  lowest  cost,  not  highest  cost.  The 
temporary  demand  price  at  a  given  moment  is  as  before  — 
that  is,  exactly  as  under  the  hypothesis  of  static  conditions  — 
fixed  at  the  point  of  highest  cost ;  for  at  any  given  moment 
there  is  always  some  unlucky  producer  under  competitive 
conditions  who  furnishes  a  part  of  the  supply  at  cost.  Next 
year  he  will  be  crowded  out,  and  his  place  will  be  taken  by 
some  one  who  can  produce  at  lower  cost.  What  under  static 
conditions  was  a  part  of  the  necessary  supply  becomes  under 
dynamic  conditions  a  part  of  the  actual,  but  temporary,  supply. 

In  practical  life,  therefore,  competitive  profits  are  dynamic 
in  their  nature.  They  exist  only  because  at  any  given  mo- 
ment some  entrepreneurs  can  produce  at  a  lower  cost  than 
those  on  the  margin,  or  no-profit  level ;  but  this  margin,  or 
no-profit  level,  is  itself  continually  changing,  and,  under  nor- 
mal conditions  of  progress,  is  continually  receding.  A  large 
class  of  commodities  —  in  fact,  all  competitive  articles  —  are, 
then,  produced  under  such  conditions  that  the  profits  rep- 
resent the  result  of  differential  advantages  of  production. 
These  differences  may  be  summed  up  under  four  heads : 
differences  of  situation  with  reference  to  the  market,  dif- 
ferences in  the  possession  of  improved  machines  or  pro- 
cesses, differences  in  the  personal  abilities  of  the  producers 
and  differences  in  opportunity  or  luck. 

Whenever  all  the  articles  in  a  given  class  are  produced  at 
the  same  cost,  in  fact,  the  resulting  profits  are  monopoly 
profits  and  not  competitive  profits.  Not  only  does  profitable 
production  at  the  same  cost  imply  monopoly,  but  monopoly 
necessarily  means  production  at  identical  cost.  Let  us  con- 
sider the  last  statement  first. 

A  monopoly  may  be  in  the  hands  of  either  a  single  pro- 
ducer or  a  combination  of  producers.  If  there  is  only  a 
single  monopolist,  there  can  obviously  be  only  a  single  cost 


Ge7ieral  Principles  237 

for  the  supply.  If  there  is  a  combination  of  producers,  the 
same  conclusion  does  not,  at  first  blush,  seem  to  follow.  There 
may  be  a  combination,  as  a  trust  or  pool,  where  the  original 
differences  of  business  ability  or  of  opportunity  among  the 
producers  subsist  after  the  formation  of  the  trust.  The  mere 
fact,  however,  that  the  least  favorably  situated  producer  enters 
the  trust  shows  that  prices  are  no  longer  fixed  at  the  point  of 
marginal  cost,  for  otherwise  he  could  not  secure  any  profits. 
As  a  matter  of  fact,  the  ordinary  agreement  in  a  trust  or  pool 
provides  for  a  lumping  together  of  the  expenses  and  the 
receipts  of  all  members  of  the  combination,  and  for  an  appor- 
tionment of  profits  according  to  a  fixed  percentage.  Thus, 
although  there  is  technically  no  production  of  all  the  units  of 
the  supply  at  identical  cost,  economically  and  so  far  as  con- 
cerns the  relation  of  the  producers  to  each  other  the  various 
parts  of  the  supply  may  be  said  to  be  virtually  produced  at 
the  same  cost. 

In  the  second  place,  profitable  production  at  the  same  cost 
implies,  in  the  long  run,  a  monopoly.  It  may  conceivably 
happen  that  in  a  regime  of  competition  all  the  producers  at 
a  particular  moment  are  men  of  precisely  the  same  abilities, 
and  subject  to  the  same  conditions.  In  this  possible  case  — 
which  is  apt  to  be  true  only  of  newly  started  industries  — 
there  would,  indeed,  be  only  one  identical  cost  for  all  units  of 
the  supply.  There  could  then,  however,  not  be  any  perma- 
nent profits  to  all  the  producers,  because  prices  could  not 
permanently  remain  above  the  mere  cost  of  production.  If 
there  were  profits  to  all  the  producers,  competition  would 
induce  one  of  them  to  lower  the  price  in  the  hope  of  securing 
larger  profits  through  greater  sales ;  or,  if  he  did  not  do  so, 
some  new  producer  would  enter  the  field  and  cut  prices. 
The  only  way  in  which  prices  could  be  permanently  kept 
at  the  old  figures  would  be  through  some  control  of  the 
supply.  As  soon  as  this  condition  came  to  pass,  however, 
we  should  no  longer  have  free  competition,  but  should  be  in 
the  presence  of  some  form  of  monopoly.  Thus  not  only  does 
monopoly  imply  production  at  the  same  cost,  but  production 


238         Shifting  and  Incidence  of  Taxation 

at  the  same  cost  involves  some  form  of  monopoly.^  Com- 
petitive profits,  on  the  other  hand,  as  we  have  seen,  imply 
varying  costs  of  production. 

In  some  competitive  industries,  however,  the  differential 
advantages  are  far  greater  than  in  others.  Obviously,  when 
these  differential  advantages  are  great,  profits  are  high  for 
the  more  efficient  producer;  when  they  are  small,  there  is 
only  a  slight  margin  of  profit.  The  older  the  industry,  or 
the  simpler  the  conditions  of  production,  the  smaller  is  likely 
to  be  the  margin  of  profit.  Furthermore,  it  must  be  remem- 
bered that  where  there  are  great  differential  advantages  of 
production,  profits  are  high  because  of  the  margin  between 
the  lowest  cost  of  the  most  efficient  producer  and  the  price 
fixed  by  the  supply  of  the  least  efficient  producer.  In  case 
there  are  no  differential  advantages  of  production  —  which, 
as  we  have  seen,  tends  to  be  true  only  of  monopoly  —  profits 
are  high  because  of  the  complete  control  of  supply.  The 
existence  of  profits  depends  here  not  upon  any  competitor, 
but  upon  the  conditions  of  maximum  monopoly  revenue  — 
that  is,  upon  the  elasticity  of  the  demand  and  the  ratio  of 
product  to  cost. 

Let  us  proceed  now  to  discuss  the  influence  of  these  condi- 
tions upon  the  incidence  of  taxation  in  industries  subject  to 
the  law  of  competition. 

The  fact  that  high  profits  or  moderate  profits  accrue  to  the 
more  favorably  situated  producer  depends,  as  has  just  been 
seen,  upon  the  differences  in  the  cost  of  producing  the  various 
parts  of  the  actual  supply  of  a  commodity. ^     If  all  the  incre- 

1  Pantaleoni,  Traslazione  dei  Tributi,  who  bases  his  treatment  of  the  taxation 
of  profits  on  what  appears  to  be  an  exaggerated  distinction  between  ordinary 
profits  and  surplus  profits,  fails  to  recognize  the  fact  that  industries  in  which  all 
the  articles  are  produced  at  the  same  cost  are  necessarily  monopolies.  Graziani, 
Instituzioni  di  Scienza  delle  Finanze,  pp.  342-344,  seems  unhesitatingly  to  follow 
Pantaleoni  in  these  points. 

2  Professor  Carver,  in  his  interesting  article  on  "  The  Shifting  of  Taxes  "  which 
was  published  in  The  Yale  Review,  v  (1896),  p.  266,  calls  attention  to  this  point. 
He  puts  the  conclusion  in  somewhat  different  language,  in  saying  that  "  the  elas- 
ticity of  the  production  or  supply  depends  upon  the  extent  to  which  rent  enters 
into  the  production  of  the  article  in  question."     By  rent  he  obviously  means  the 


General  Principles  239 

ments  of  the  supply  are  produced  at  a  cost  which  varies  but 
little  from  the  market  price,  not  only  will  all  profits  be  small, 
but  any  appreciable  increase  of  cost  due  to  the  imposition  of 
a  tax  will  tend,  ordinarily,  to  bring  about  a  diminution  in  the 
amount  produced,  because  it  will  trench  on  the  narrow  margin 
between  cost  and  price.  A  tax  will  be  likely,  therefore,  by 
limiting  the  supply,  to  raise  price.  Under  such  conditions, 
the  consumer  will  tend  to  bear  more  of  the  burden. 

On  the  other  hand,  if  the  margin  between  cost  and  price  is 
considerable,  and  if  the  more  favorably  situated  producers 
earn  large  profits,  a  tax  will  bring  about  a  relatively  smaller 
decrease  in  supply,  and  the  augmentation  of  price  to  the 
consumer  will  tend  to  be  less.  In  such  cases,  since  the 
margin  between  the  price  and  the  cost  for  the  most  favorably 
situated  producer  is  so  great,  the  influence  of  the  law  of 
increasing  cost,  referred  to  in  the  next  section,^  will  not  be 
felt  to  such  a  degree  at  first ;  that  is,  there  is  greater  likeli- 
hood that  the  more  capable  producers  will  be  able  to  fill  the 
gap  caused  by  the  cessation  of  production  on  the  part  of  the 
less  efficient  producers.  There  may  even  be  no  decrease  at 
all  in  the  supply,  the  only  difference  being  that  the  level  of 
marginal  cost  is  now,  with  a  part  of  the  tax  added,  a  little 
higher  than  before.  The  effect  of  a  tax  may  then  be  to  ruin 
the  less  efficient  producers,  although  the  more  favored  pro- 
ducers will  no  doubt  also  have  their  profits  somewhat  cur- 
tailed ;  but  a  smaller  part  of  the  tax  than  before  will  be 
shifted  to  the  consumer. 

It  was  stated  above  ^  that  the  elasticity  of  supply  depends 
not  only  upon  the  extent  to  which  differential  advantages  of 
production  enter  into  the  supply,  but  also  on  the  ratio  of 
product  to  cost.  Having  discussed  the  first  condition,  we 
come  now  to  the  second. 

result  of  diflferential  advantages  of  production.  Professor  Carver's  statement  is  to 
be  criticised,  hovtrever,  because  of  his  inattention  to  the  other  point  which  affects 
elasticity  of  supply  —  namely,  the  ratio  of  product  to  cost  —  which  is  discussed 
below. 

1  Below,  p.  243.  8  See  p.  233. 


240  Shifti7ig  and  Incidence  of  Taxation 

7.    Is  the  Article  supplied  at  a  Constant,  an  Increasing  or  a 

Diminishing  Cost  ? 

It  is  well  known  that  in  certain  occupations,  or  under  given 
conditions,  every  successive  application  of  capital  or  labor 
gives  returns  of  approximately  constant  amount.  The  prod- 
uct is  then  in  exact  ratio  to  the  amount  of  capital  or  labor 
applied,  and  the  industry  is  said  to  be  subject  to  the  law  of 
constant  returns.  The  normal  value  of  an  article  which  is 
thus  reproducible  at  a  fixed  cost  tends  to  be  equal  to  the 
cost  of  production. 

In  certain  occupations,  however,  every  successive  applica- 
tion of  capital  gives  returns,  not  of  the  same,  but  of  a  con- 
tinually smaller  amount.  The  industry  is  then  said  to  be 
subject  to  the  law  of  diminishing  returns,  or  of  increasing 
cost.  This  condition  is  normally  true  of  agriculture,  and 
forms  the  basis  of  the  Ricardian  law  of  rent.  How  far  it 
is  applicable  to  industry  in  general  after  a  certain  stage  of 
profitableness  has  been  passed,  we  shall  see  in  a  moment. 
On  the  other  hand,  the  industry  may  obey,  up  to  a  certain 
point,  the  law  of  increasing  returns  or  of  diminishing  cost.  ^ 
For  instance,  where  in  any  industry  the  proportion  of  fixed 
or  constant  expenses  to  total  expenses  is  large,  a  consider- 
able increase  of  production  can  often  be  made  without  a 
corresponding  increase  of  cost.  Successive  applications  of 
capital  and  labor  thus  tend  to  produce  returns  which  are,  to 
a  certain  point,  increasingly  greater  in  amount.  The  prod- 
uct is  not  proportional,  but  progressive. 

Although  this  conception  of  the  laws  of  constant,  increas- 
ing and  diminishing  returns  is  an  old  one,  their  application 
to  the  facts  of  actual  life  is  often  misunderstood.  The  law 
of  constant  returns  is  generally  assumed  to  be  the  normal 
law,  while  the  laws  of  increasing  and  diminishing  returns  are 
supposed  to  be  the  exceptions.  A  more  careful  consider- 
ation, however,  shows  that  in  ordinary  competitive  enter- 
prises the  law  of  diminishing  returns  is  the  normal  law. 
This  has  usually  been  recognized  as  true  of  agriculture ;  but 


General  Principles  241 

it  is  equally  true  of  other  occupations.  In  order  to  show  this 
clearly,  let  us  examine  somewhat  more  closely  what  is  the  real 
import  of  the  laws  of  diminishing  and  of  increasing  returns. 

The  action  of  the  law  of  diminishing  returns  manifests 
itself  in  two  ways.  The  fact  that  after  a  certain  point  has 
been  reached  production  does  not  respond  proportionately  to 
the  energy  applied,  and  that  every  new  "dose"  of  capital 
and  labor  gives  less  and  less  returns,  is  familiar  to  all 
engaged  in  ordinary  agricultural  operations.  The  soil  may 
be  prevented  from  deterioration  by  the  skilful  use  of 
manures ;  it  may  even  be  improved  through  the  discovery  of 
newer  methods  of  cultivation ;  but  the  point  must  soon  come 
when  the  increase  of  production  will  be  overtaken  by  the 
increased  application  of  capital  and  labor,  and  when  the 
returns,  as  compared  to  the  expenditure  of  capital  and  labor, 
will  diminish.  The  second  way  in  which  the  law  may  work 
itself  out  is  generally  illustrated  by  a  mine.  Here,  although 
the  returns  may  seem  to  be  constant  from  year  to  year,  the 
capital  itself  which  yields  the  returns  is  being  slowly  con- 
sumed. At  the  end  of  a  given  period,  not  only  will  the 
returns  themselves  abruptly  stop,  but  the  possibility  of  secur- 
ing additional  returns  in  the  future  will  also  have  disappeared. 
We  must,  therefore,  abstract  from  each  recurring  return  a 
sum  which,  when  capitalized  at  the  rate  of  production,  will 
ultimately  amount  to  the  total  original  capital.  Translated 
into  ordinary  business  language,  we  must  allow  for  depre- 
ciation of  stock  or  plant  —  a  depreciation  which,  when  con- 
tinued long  enough,  will  entirely  consume  the  initial  capital. 
In  the  first  case  of  diminishing  returns,  then,  typified  by 
agricultural  land,  the  actual  produce  becomes  yearly  less ;  in 
the  second  case,  illustrated  by  mining  or  badly  conducted 
forestry,  the  nominal  produce  may  remain  the  same,  but  the 
actual  return  on  the  investment  of  capital  becomes  con- 
tinually smaller.  In  both  cases,  therefore,  the  cost  is  a 
proportionately  increasing  one. 

When  we  take  up  the  law  of  diminishing  cost  or  increasing 
returns,  we  likewise  find  that  it  assumes  two  forms  in  ordi- 


242  Shifting  and  Incidence  of  Taxation 

nary  industry.  The  one  great  cause  of  increasing  returns  is 
what  may  be  termed  concentration  ;  the  other  may  be  termed 
natural  selection.     How  do  these  operate } 

The  economies  of  production,  due  to  the  concentration  of 
smaller  enterprises  into  a  large  concern,  have  been  made 
familiar  in  recent  years.  In  all  enterprises  where  the  invest- 
ment of  capital  is  considerable,  the  proportion  of  constant 
expenses  to  variable  expenses  is  apt  to  be  large.  Some 
expenses  necessarily  grow  with  every  increase  of  business; 
other  expenses  remain  the  same,  whether  the  business  is  large 
or  small.  In  fact,  certain  expenses  will  be  actually  smaller 
with  large  transactions  concentrated  into  one  hand,  than  with 
an  equal  amount  of  transactions  distributed  through  a  variety 
of  producers.  Up  to  a  certain  point,  then,  it  is  possible  that 
an  increase  of  capital  and  labor  will  give  more  than  propor- 
tionate returns.  We  say,  up  to  a  certain  point,  —  because  we 
must  assume  that  here  also  a  time  must  come  when  the  law 
of  diminishing  cost  loses  its  efficacy  ;  for  we  should  otherwise 
get  the  absurd  result  of  production  without  any  cost  at  all. 

But  concentration  is  not  the  only  cause  of  increasing 
returns.  There  is,  under  competitive  conditions,  as  we 
pointed  out  above,  a  continual  tendency  for  the  less  efficient 
producer  to  be  crowded  out  by  the  more  efficient.  The 
marginal  producer  —  he  who  is  just  able  to  keep  his  head 
above  water  —  is,  under  ordinary  conditions  of  industrial 
progress,  thrown  back  into  the  ocean  of  failure  and  despair ; 
his  place  is  taken  by  a  more  successful  competitor,  a  new 
marginal  producer  who,  for  a  time,  continues  to  exist  because 
he  can  produce  more  cheaply,  but  who  is  himself  soon  forced 
to  succumb.  This  continual  weeding  out,  to  change  the 
metaphor,  of  the  unfortunate  or  the  incompetent  is  equivalent 
to  the  process  of  natural  selection.  The  community  gains, 
because  it  enjoys  the  services  of  the  more  efficient  producer ; 
and  this  greater  efficiency  shows  itself  in  the  increasing  ratio 
of  output  to  every  new  investment  of  capital.  Thus,  where 
industry  is  not  stationary  or  retrograding,  the  natural  selec- 
tion of  entrepreneurs  means  production  at  a  diminishing  cost. 


General  Principles  243 

If  we  attempt  now  to  analyze  the  facts  of  actual  business 
life,  we  shall  find  that  the  forces  which  make  for  diminishing 
returns  and  those  which  make  for  increasing  returns  are 
combined  in  different  proportions  in  various  enterprises. 
Upon  the  proportion  in  which  they  are  combined  depends  the 
trend  toward  monopoly  or  toward  competition. 

Suppose,  for  instance,  that  in  any  enterprise  the  economies 
resulting  from  concentration,  and  the  lower  cost  due  to  natu- 
ral selection  of  the  producers,  are  just  about  counterbalanced 
by  the  difficulties  of  securing  additional  room  for  production, 
or  by  drawbacks  connected  with  the  marketing  of  an  increased 
output.  In  such  a  case,  where  the  forces  making  for  in- 
creasing returns  and  those  making  for  decreasing  returns  are 
evenly  balanced,  the  result  will  be  production  according  to 
the  law  of  constant  returns.  Under  such  conditions,  how- 
ever, there  is  no  obvious  reason  why  the  more  efficient  pro- 
ducer will  not  be  able  to  increase  his  output  and  thus  gradu- 
ally to  crowd  out  his  less  efficient  competitors  until  he  secures 
a  monopoly.  Although  he  produces  at  constant  cost,  and 
his  percentage  of  profit  remains  the  same,  his  total  profits 
will  grow  with  the  increase  of  production,  except  in  so  far  as 
the  greater  output  may  slightly  reduce  the  price.  There  is 
no  rigid  limit  to  the  increase  of  output ;  the  more  efficient  the 
producer,  the  greater  the  ease  with  which  he  will  be  able  to 
command  sufficient  additional  capital  to  e.xpand  his  business. 
The  law  of  constant  cost,  therefore,  presupposes  an  industry 
on  the  high  road  to  monopoly. 

Suppose  again  that  the  industry  is  subject  to  the  law  of 
increasing  returns  or  diminishing  cost.  Here  it  is  plain  that 
the  trend  will  be  still  more  strongly  toward  monopoly.  Un- 
less the  returns  are  unequally  increasing,  so  that  the  less 
favorably  situated  producer  can  still  hold  his  own  with  the 
more  fortunate  producer,  and  thus  continue  to  furnish  an 
actual  part  of  the  supply,  the  more  efficient  producer  will 
quickly  —  more  quickly  than  in  the  preceding  case  —  gain 
control  of  the  market.  When  the  conditions  are  such  as 
to  realize  the  economies  of  natural  selection,  the  tendency 


244  Shifting  a7id  Incide^tce  of  Taxation 

toward  monopoly  is  a  strong  one.  When  the  economies  of 
natural  selection  are  joined  to  those  of  concentration,  the 
tendency  toward  monopoly  is  accelerated.  It  is  precisely 
because  in  modern  times  the  forces  working  toward  diminish- 
ing returns  have,  in  so  many  instances,  been  overtaken  by 
man's  mastery  over  nature  that  we  notice  the  well-defined 
movement  toward  trusts,  pools  and  combinations. 

It  is  plain,  then,  that  the  law  of  constant  returns,  and  still 
more  the  law  of  increasing  returns  or  diminishing  cost,  is 
unfavorable  to  the  persistence  of  competition.  The  normal 
law  of  competitive  industry,  under  static  conditions,  is  the 
law  of  diminishing  returns  or  increasing  cost ;  and  even 
under  conditions  of  actual  life  —  that  is,  under  dynamic 
conditions  —  a  competitive  industry  may  be  said  to  obey 
the  law  of  constant  or  of  increasing  returns  only  during  a 
period  of  transition.  Constant  returns  and,  to  a  still  greater 
extent,  increasing  returns  or  diminishing  cost,  tend  toward 
monopoly.  It  is  only  at  a  given  time,  and  in  a  given  industry 
which  is  in  the  process,  slow  or  fast,  of  being  monopolized, 
that  the  laws  of  constant  or  of  diminishing  cost  can  prevail. 
When  once  the  complete  monopoly  has  been  reached,  the 
industry  may  obey  the  law  of  diminishing,  constant  or  in- 
creasing cost  according  to  the  conditions  of  the  particular 
case.  But  the  chances  of  the  continuance  of  the  monopoly 
will  be  more  secure  when  it  obeys  the  law  of  constant  cost 
rather  than  of  increasing  cost  or  diminishing  returns  ;  and 
they  will  be  still  more  secure  when  the  monopoly  obeys  the 
law  of  diminishing  cost  or  increasing  returns. 

Let  us  now  extend  this  analysis  to  the  subject  of  incidence 
of  taxation,  and  let  us  consider  first  the  case  of  industries  sub- 
ject to  competition. 

If  the  competitive  industry  obeys  the  law  of  constant  cost, 
the  extent  to  which  a  tax  will  increase  the  price  depends, 
other  things  being  equal,  primarily  on  the  nature  of  the 
demand  curve.  The  more  persistent  the  demand,  the  greater, 
as  we  have  seen,  is  the  proportion  of  the  tax  which  the  pro- 
ducers will  be  able  to  add  to  the  price.     If  a  competitive 


General  Principles  245 

industry,  however,  obeys  the  law  of  increasing  returns  or 
diminishing  cost,  which  as  we  have  learned  is  true  only  of 
periods  of  transition,  the  tendency  of  the  producer  will  be  to 
add  more  of  the  tax  to  the  price  than  in  the  case  of  constant 
returns.  For  any  increase  of  price  due  to  the  tax  will  tend 
to  decrease  consumption.  If  he  produces  less,  however,  each 
unit  will,  under  the  assumption  that  he  has  been  producing 
under  conditions  of  increasing  returns,  cost  the  producer, 
exclusive  of  the  tax,  more  than  before.  But  if  he  remains 
a  marginal  producer,  the  price  must  finally  find  its  level  at 
this  point  of  higher  cost  to  the  marginal  producer.  In  other 
words,  the  price  will  tend  to  rise  to  a  point  higher  than  in  the 
case  of  constant  returns.  Of  course,  if  he  does  not  continue 
to  compete,  but  is  crowded  out  by  the  abler  producer,  who 
can  more  easily  capture  the  market  under  conditions  of  in- 
creasing returns,  this  result  does  not  necessarily  follow.  It 
may  happen,  for  instance,  that  the  more  favored  producer 
will  take  advantage  of  the  tax  to  drive  the  old  marginal 
producer  out  by  adding  only  a  small  part  of  the  tax  to  the 
price,  hoping  to  recoup  himself  by  an  ultimate  monopoly ; 
and  then,  when  he  secures  a  monopoly,  he  may  put  the  price 
up  again.  But  granting  a  continuance  of  the  competitive 
conditions,  with  the  old  marginal  producer  still  supplying  his 
share  of  the  output,  the  addition  to  the  price,  as  long  as  the 
competition  lasts,  will  tend  to  be  greater  than  in  the  case  of 
constant  returns.  It  must  continually  be  borne  in  mind  that 
under  the  regime  of  competition  price  always  equals  marginal 
cost;  whatever  increases  this  marginal  cost  increases  price. 
The  action  of  the  law  of  increasing  returns  tends  to  aug- 
ment the  marginal  cost  for  the  smaller  output  which  results 
from  the  imposition  of  a  tax ;  therefore  it  tends  to  increase 
the  price. 

If  the  competitive  industry,  on  the  other  hand,  obeys,  as  is 
usually  the  case,  the  law  of  diminishing  returns  or  increasing 
cost  —  where  each  increment  in  the  amount  produced  costs 
more  than  the  last  —  the  producer  will  be  likely  to  add  less 
of  the  tax  to  the  price  than  in  the  case  of  constant  or  dimin- 


246  Shifting  and  Incidence  of  Taxation 

ishing  cost.  For  although  the  increase  of  price  consequent 
upon  the  imposition  of  any  part  of  the  tax  will  decrease 
consumption,  each  unit  of  this  smaller  output  will,  on  the 
hypothesis  that  he  has  been  producing  under  conditions  of 
diminishing  returns,  cost  the  producer  less  than  before.  Since 
price  is  fixed,  under  competitive  conditions,  at  any  given 
moment  at  the  point  of  greatest  cost,  and  since  the  cost  to  the 
marginal  producer  who  remains  a  competitor  is  reduced,  the 
price  will  now  be  a  little  lower  than  in  the  case  of  constant 
returns,  and  still  lower  than  in  the  case  of  increasing  returns.^ 

1  The  argument  in  the  text  may  be  illustrated  by  diagrams.  In  Fig.  i,  let  DD' 
be  the  demand  curve.  Let  OX\ie.  the  amount  of  product;  let  CFbe  the  line  of 
price;  let  OL  be  the  marginal  cost  before  the  tax,  corresponding  to  the  supply 
curve  S' S;  let  ZCbe  the  amount  of  the  tax  added  to  the  price  under  the  law  of 
constant  returns,  so  that  the  price  after  the  imposition  of  the  tax  is  OC,  corre- 
sponding to  the  new  position  of  the  supply  curve  TT' .  If  OM  is  the  amount 
produced  at  the  original  price  OL,  giving  gross  receipts  of  OLSM,  the  amount 
produced  after  the  price  has  been  raised  to  OC  will  be  OM',  giving  gross  receipts 
of  OCT'M'. 

If  the  industry  obeys  the  law  of  diminishing  cost,  as  in  Fig.  2,  the  line  5" .Swill 
be  curved  downward.  Before  the  tax  is  imposed,  the  quantity  OM  will,  as  before, 
be  sold  at  the  price  OL  or  MS.  But  after  the  tax  is  imposed,  equilibrium  will  be 
attained  when  the  new  supply  curve  TT"  intersects  DD',  which  will  in  this  case 
be  somewhat  to  the  left  of  the  old  point  of  intersection;  so  that  now  the  quantity 
OM"  will  be  sold  at  the  price  M"  T"  or  OE,  which  is  higher  than  OC. 


O  M'  M. 

Fig.  I. 
Constant  Returns. 


O  M"    M 

Fig.  2. 
Increasing  Returns 
or  Diminishing  Cost. 


O  m'^m 

Fig.  3. 
Diminishing  Returns 
or  Increasing  Cost. 


If  the  industry  obeys  the  law  of  increasing  cost,  as  in  Fig.  3,  the  line  S'" S  will 
be  curved  upward.  Now,  after  the  imposition  of  the  tax,  the  price  will  be  fixed  at 
the  point  T",  so  that  the  quantity  OM'"  will  be  sold  at  the  price  M"'T"',ot 
OB,  which  is  lower  than  OC. 

The  extent  to  which  in  any  case  the  new  price,  after  the  imposition  of  the 
tax,  exceeds  the  old  price  OL  depends  primarily  upon  the  elasticity  of  the  demand, 
that  is,  the  sharpness  of  the  curve  DD' ;  but  starting  out  from  this  increase  of 
price  under  the  law  of  constant  cost,  diminishing  cost  adds  more  to  the  price, 
increasing  cost  adds  less  to  the  price. 


General  Principles  247 

In  the  case  of  monopoly,  there  is  indeed  no  marginal  pro- 
ducer, but  the  influence  of  diminishing  and  increasing  returns 
is  apt  to  be  similar  to  that  in  the  case  of  competition.  For  if 
a  monopolized  article  is  the  product  of  an  industry  which 
obeys  the  law  of  increasing  return  or  diminishing  cost, — 
where  each  increment  in  the  amount  produced  costs  less  than 
the  preceding, —  then  as  compared  with  an  industry  subject  to 
the  law  of  constant  return,  the  price  of  the  article  before  the 
imposition  of  the  tax  will  be  apt  to  be  lower,  it  the  total  cost 
remains  the  same.  That  is,  other  things  being  equal,  the 
point  of  maximum  monopoly  revenue  will  be  reached  at  a 
lower  price  (which  means  a  greater  output)  in  the  case  of  an 
industry  of  increasing  return  than  in  the  one  of  constant 
return.  But  if  the  price  before  the  imposition  of  the  tax  is 
less  it  follows  that,  after  the  tax  is  imposed  and  given  the 
same  degree  of  elasticity  of  demand  in  both  cases,  the  monop- 
olist under  conditions  of  increasing  return  will  have  more  of 
a  margin  within  which  he  can  profitably  raise  the  price  than 
under  conditions  of  constant  return.  The  tendency  will  thus 
be  that,  as  in  the  case  of  competition,  he  will  add  more  of  the 
tax  to  the  price.  Vice  vcrsd,  under  conditions  of  diminishing 
return,  or  increasing  cost,  the  monopolist  producer  will  be 
likely  to  add  less  of  the  tax  to  the  price  than  in  the  case  of 
constant  return. 

Combining  the  conclusions  reached  under  divisions  6  and 
7  of  this  chapter,  it  is  evident  that  elasticity  of  supply  —  by 
which  we  mean  the  responsiveness  of  the  quantity  produced 
to  fluctuations  in  price  —  depends  on  a  combination  of  two 
factors :  the  degree  to  which  differential  advantages  of  pro- 
duction exist,  and  the  ratio  of  product  to  cost.  The  greater 
the  chance  that  the  imposition  of  a  tax  will  cause  a  diminution 
of  supply,  the  less  favorable  will  be  the  situation  of  the  con- 
sumer ;  the  smaller  the  prospect  of  a  decrease  in  the  supply, 
the  more  favorable  will  be  his  position.^ 

^  In  the  first  edition  of  this  work  (pp.  151,  152)  the  reasoning  was  applied 
only  to  cases  of  competition.  Professor  Marshall,  likewise,  in  his  interesting  dis^ 
cussion  {Principles  of  Economics,  book  v,  chap,  xii,  §  4,  p.  524  of  3d  ed.)  deals 


248  Shifting  and  hicidence  of  Taxation 

We  may  therefore  sum  up  this  part  of  the  discussion  that 
has  been  carried  on  under  divisions  5,  6  and  7,  as  follows : 
The  degree  to  which  a  tax  on  a  particular  commodity  will  be 
shifted  to  the  consumer  will  vary  inversely  as  the  elasticity 
of  the  demand  and  directly  as  the  elasticity  of  the  supply. 
The  elasticity  of  demand  depends  upon  the  extent  to  which 
the  commodities  in  question  are  removed  not  only  from  the 
category  of  complementary  goods,  but  also  from  that  of 
absolute  necessaries  or  of  high-priced  luxuries.  The  elas- 
ticity of  supply  depends  upon  the  extent  to  which  differential 
advantages  affect  the  production,  as  well  as  upon  the  ratio  of 
product  to  cost.  It  may  be  laid  down  as  a  general  law  that 
when  the  demand  is  more  elastic  than  the  supply,  the  con- 
sumer will  bear  a  smaller  part  of  the  tax  than  when  the  sup- 
ply is  more  elastic  than  the  demand.  Whether  a  tax  will  be 
shifted  in  its  entirety,  in  part,  or  not  at  all,  depends  on  the 
article  itself,  on  the  degree  to  which  other  articles  may  be 
substituted  for  it,  on  the  size  of  the  margin  of  profit,  and  on 
the  degree  to  which  monopoly  enters  into  the  nature  of  the 
industry  on  the  product  of  which  the  tax  is  laid.  For  the 
working  out  of  this  law  in  practice,  the  reader  is  referred  to 
the  succeeding  chapters  of  the  present  work.  The  effect  of 
a  bounty  will  naturally  be  the  reverse  of  a  tax. 

These  statements,  so  far  as  we  disregard  the  limiting  or 
opposing  forces  referred  to  in  divisions  i  to  4  above,^  contain 
the  general  law  of  shifting.  We  need  still  to  discuss,  how- 
ever, a  few  considerations,  limiting  the  general  law,  which, 
although  of  not  very  great  theoretical  importance,  are  never- 
theless often  of  considerable  practical  influence  in  actual  life. 
To  these  minor  considerations  we  shall  now  address  ourselves. 

only  with  cases  of  competition.  In  the  second  edition  (pp.  204  et  seq.')  an  at- 
tempt was  made  to  distinguish  in  this  respect  between  conditions  of  competition 
and  of  monopoly.  In  the  present  edition,  the  attempt  has  been  dropped  in 
deference  to  the  criticisms  urged  by  Professor  Edgeworth  in  the  Economic  Journal, 
ix  (1899),  pp.  293-302.  The  point  involved  is  one  of  slight  practical  importance. 
With  Professor  Edgeworth's  remaining  criticisms,  however,  I  am  unable  to  agree, 
as  will  appear  later  on  in  the  discussion  especially  of  the  tax  on  profits. 
1  See  pp.  221,  226  and  227. 


General  Principles  249 

8.    Is  the  Tax  imposed  on  Margin  or  on  Surplus  ? 

When  we  say  that  the  price  of  a  commodity  under  the  law 
of  competition  is  fixed  by  the  cost  of  production,  we  refer  to 
the  cost  of  producing  the  most  expensive  portion  of  the 
actual  supply.  This  must  not,  however,  be  misunderstood. 
As  was  already  stated,  the  tendency  of  prices  is  to  gravitate 
toward  the  cost  of  producing  the  least  expensive,  not  the 
most  expensive,  part  of  the  supply.  Through  the  processes 
both  of  concentration  and  of  natural  selection,  the  least 
efficient  producers  are  continually  being  crowded  out,  and  the 
price  of  the  product  is  continually  being  reduced  —  up  to  that 
point,  at  all  events,  where  there  is  no  possibility  of  further 
economies.  But  while  the  tendency  is  thus  in  the  direction 
of  lowest  cost,  the  temporary  equilibrium  between  demand 
and  supply  at  any  given  moment  adjusts  itself  at  the  point 
of  highest  cost.  In  any  given  season,  when  a  commodity 
is  sold,  there  is  under  competitive  conditions  a  producer  who 
just  gets  back  his  cost,  because  his  cost  is  equal  to  the  price 
at  which  the  whole  supply  is  sold.  In  this  sense  he  is  the 
marginal  producer,  his  product  is  the  marginal  product,  and 
the  price  of  the  whole  supply  is  fixed  at  the  point  of  the  cost 
of  the  marginal  product. 

It  is  clear,  now,  that  if  a  tax  is  imposed  it  will  increase  the 
cost  of  this  marginal  product,  and  provided  that  the  marginal 
producer  continues  to  produce  and  to  remain  the  marginal 
producer,  the  price  of  the  whole  supply  will  be  raised  by  the 
amount  of  the  tax.  To  the  extent  that  the  marginal  producer 
is  crowded  out,  a  smaller  proportion  of  the  tax  will  be  added 
to  price. 

It  may  happen,  however,  that  the  tax  does  not  hit  the 
marginal  product  at  all.  This  may  be  due  to  two  causes. 
In  the  first  place,  the  tax  may  be  imposed  on  product,  but 
it  may  reach  only  other  portions  of  the  supply  than  the 
marginal  portion.  In  the  case  of  interstate  or  international 
competition,  for  example,  one  state  may  tax  that  part  of  the 
supply  produced  within  its  borders,  while  the  price  may  be 


250  Shifting  and  Incidence  of  Taxation 

fixed  in  the  international  market,  where  the  most  expensive 
increment  of  the  supply  comes  from  a  country  which  imposes 
no  tax.  The  tax  assessed  in  the  first  state  will  thus  not 
reach  the  marginal  product,  and  will  produce  no  effect  on 
the  price.  Not  until  the  tax  is  so  high  that  the  increased 
cost  of  this  portion  will  relegate  it  to  the  position  of  the  mar- 
ginal product  can  the  tax  influence  the  price. 

Secondly,  a  tax  may  not  reach  the  marginal  product  be- 
cause it  is  not  imposed  on  production  at  all.  It  may  be 
imposed,  not  on  production,  but  on  the  results  of  production. 
In  order  that  any  change  may  take  place  in  price,  there  must 
be,  as  we  have  seen,  some  alteration  in  the  supply.  A  tax 
on  the  marginal  product  would  obviously  at  once  tend  to 
cause  such  an  alteration  in  the  supply.  But  if  the  tax  is 
imposed  on  what  accrues  to  the  producer  after  all  his  ex- 
penses are  deducted  and  his  accounts  closed,  the  tendency  to 
an  alteration  in  the  supply  will  be  diminished.  The  surplus 
above  all  expenses  constitutes  net  profits  or  pure  profits. 
Pure  profits  are  the  results  of  price,  not  the  conditions  of 
price.  A  tax  on  surplus  or  profits,  therefore,  would  not  reach 
the  marginal  product,  and  would  not  cause  any  tendency  to  a 
change  of  price.  It  is  only  through  the  slower  and  more 
indirect  influence  of  a  general  fall  in  profits  that  any  alter- 
ation, if  at  all,  would  take  place.  The  greater  the  extent, 
therefore,  to  which  the  tax  falls  on  surplus,  instead  of  on 
margin,  the  smaller  the  chance  of  any  shifting  of  the  tax. 

9.   Is  the   Tax  Large  or  Small  f 

From  the  point  of  view  of  pure  theory  it  might  seem 
immaterial  what  the  rate  of  tax  is;  for  however  slight  the 
charge  might  be,  it  would  still  be  mathematically  measurable. 
But  in  practical  life  individuals  often  observe  the  same  prin- 
ciple that  is  expressed  in  the  legal  maxim  de  minimis  non 
curat  lex.  A  producer  who  is  called  upon  to  pay  a  very 
small  tax  which  would,  under  ordinary  conditions,  be  shifted 
to  the  consumer,  may  prefer  to  assume  it  himself  rather  than 


General  Principles  251 

to  run  the  risk  of  annoying  his  customer  about  what  is  after 
all  a  trifle.  Or  the  price  of  the  commodity  may  be  fixed  by 
custom,  so  that  the  producer  will  not  dare  to  risk  loss  by  any 
addition  to  the  price.  A  good  example  of  the  first  case  is 
the  small  tax  imposed  by  the  United  States  in  1898  on  parlor- 
car  tickets.  Rather  than  to  annoy  the  passengers,  the  com- 
panies assumed  the  tax.  An  equally  good  example  of  the 
second  case  is  the  small  additional  tax  imposed  by  the  United 
States  at  the  same  time  on  certain  brands  of  cigars  and 
tobacco,  which  continued  to  sell  at  the  same  price  after  the 
imposition  of  the  tax.  As  a  former  five-cent  cigar  or  five- 
cent  package  of  tobacco  could  not  have  been  sold  at  five  and 
a  half  or  six  cents,  the  only  way  in  which  the  producer  could 
escape  the  tax  was  through  a  deterioration  of  the  article. 
How  far  competition  would  permit  him  to  do  this  is  uncer- 
tain. In  all  such  cases  the  unit  on  which  the  tax  is  imposed 
is  of  considerable  importance. 

On  the  other  hand,  it  is  equally  true  that  a  very  small  tax 
may,  in  certain  cases,  make  little  difference  to  the  consumer. 
The  elasticity  of  the  demand  may  not  be  appreciably  affected. 
Under  such  conditions  a  producer  who  would  otherwise  be 
tempted  to  bear  the  tax  for  fear  of  losing  the  trade  will  have 
no  scruples  in  adding  the  tax  to  the  price. 

10.    Is  the  Tax  Proportional  or  Graduated? 

The  considerations  hitherto  advanced  as  to  the  normal  con- 
sequences of  the  imposition  of  a  tax  depend  on  the  hypothe- 
sis that  the  tax  is  proportional.  Since  a  graduated  tax  is  the 
rare  exception  rather  than  the  rule  in  practical  life,  those  con- 
clusions are  in  general  valid.  But  we  occasionally  find —  with 
increasing  frequency  in  modern  democracies  —  that  the  rate  of 
a  given  tax  is  graduated,  instead  of  being  proportional.  In 
almost  all  such  cases  the  rate  is  graduated  upward,  so  that 
the  tax  is  progressive  ;  in  very  rare  instances  the  rate  decreases 
with  the  amount  assessed,  so  that  the  tax  is  regressive.^ 

'  For  a  fuller  discussion  of  these  terms,  see  Seligman,  Progressive  Taxation  in 
Theory  and  Practice.     2d  ed.,  New  York,  1908,  pp.  4-6. 


252  Shifting  and  Incideiice  of  Taxatio7i 

Where  such  a  tax  is  assessed  on  surplus  instead  of  on 
margin,  our  conclusions  respecting  the  shifting  of  a  tax 
require  little,  if  any,  modification.  Whether  inheritances, 
for  instance,  are  taxed  proportionally  or  progressively  can- 
not alter  the  fact  of  the  non-transference  of  the  tax.  But 
when  a  tax  is  imposed  on  the  marginal  product  —  for  instance, 
on  gross  product  or  on  gross  receipts  —  it  is  obvious  that  a 
progressive  rate  may  completely  alter  the  normal  conditions  of 
profitableness.  Under  ordinary  conditions,  a  proportional  tax 
which  reaches  the  marginal  product  tends  to  increase  the 
price,  as  we  have  seen,  by  increasing  the  cost  of  this  mar- 
ginal product.  But  a  progressive  tax  may  be  so  arranged 
that  it  will  increase  the  expenses  of  the  more  favorably  situ- 
ated producer  far  more  than  those  of  the  one  who  has 
hitherto  been  the  marginal  producer.  It  depends  upon  the 
extent  of  the  progression  whether  the  former  marginal  pro- 
ducer now  becomes  the  favored  producer  or  not.  It  may 
easily  happen  that  a  progressive  tax  on  product  in  general 
will  not  reach  the  margin  at  all.  Where  a  proportional  tax 
would  exert  a  decided  influence  on  cost,  a  progressive  tax 
may  exert,  therefore,  a  far  smaller  influence.  If  a  progres- 
sive tax  be  levied  on  the  buyer  instead  of  on  the  seller,  the 
result  may  be  just  the  reverse.  In  other  words,  the  inci- 
dence of  a  graduated  tax  is  often  less  predictable  than  the 
incidence  of  a  proportional  tax.  In  the  remainder  of  this 
work,  unless  the  contrary  is  definitely  asserted,  we  shall 
always  use  the  word  "tax"  in  the  sense  of  a  proportional  tax. 

II.    Is  the  Commodity  taxed  a  Final  Good  or  merely  aji 
Intermediate  Good? 

The  entire  discussion  thus  far  has  proceeded  on  the  as- 
sumption that  the  commodity  subject  to  the  tax  is  disposed 
of  by  the  owner,  without  considering  whether  the  owner  is 
the  original  producer  or  not.  Without  the  phenomena  of 
exchange,  however,  the  conditions  which  affect  the  demand 
or  supply  cannot  be  present.     Moreover,  if  the  commodity 


General  Principles  253 

subject  to  the  tax  has  reached  its  final  owner,  to  be  consumed 
by  him — no  matter  how  protracted  the  period  of  consump- 
tion—  there  is  no  opportunity  for  setting  in  motion  the  forces 
that  affect  price.  Once  the  tax  has  been  shifted  to  the  con- 
sumer, it  will  remain  there.  On  the  other  hand,  if  the  com- 
modity is  consumed  productively,  instead  of  unproductively, 
the  user  is  no  longer  the  ultimate  consumer;  the  commodity 
in  question  is  only  an  intermediate  good,  not  a  final  good ; 
and  the  whole  case  is  reopened. 

In  studying  the  consequences,  therefore,  of  any  particular 
tax  in  its  practical  operation,  we  must  bear  in  mind  not  only 
the  normal  theory,  but  the  limiting  conditions.  In  order  the 
better  to  prepare  ourselves  for  the  study  of  their  application, 
let  us  sum  up  these  principles.^ 

1.  The  more  durable  the  thing  taxed,  the  larger  will  be 
the  series  of  annual  payments  demanded  by  the  tax,  and  the 
more  disastrous  will  be  the  weight  of  future  payments  when 
shifted  back  upon  the  initial  proprietor  by  future  owners. 

2.  If  the  object  is  monopolized,  the  price  is  not  fixed  by 
any  marginal  product ;  hence  the  tax  will  not  be  shifted  so 
easily  as  in  the  case  of  the  increased  cost  of  a  marginal 
product. 

3.  The  more  general  or  the  less  exclusive  the  tax,  the  nar- 
rower the  taxless  field  to  which  the  producers  concerned  can 
migrate ;  hence  the  greater  the  incentive  to  bear  the  burden 
themselves. 

4.  If  the  capital  is  fixed,  or  if  there  is  any  obstacle  to 
perfect  mobility,  the  shifting  will  be  slighter  and  tardier  than 
otherwise. 

^  It  sometim  s  happens  that  a  review  of  an  author's  book  puts  the  points  made 
by  him  in  a  ne.v  hght.  So  Professor  Ross,  in  his  account  of  the  first  edition  of 
this  work,  brouj^ht  together  the  various  principles  laid  down  therein  but  scattered 
through  the  different  chapters.  In  so  doing,  he  has  greatly  clarified  the  whole 
exposition.  See  his  essay,  "  Seligman's  Shifting  and  Incidence  of  Taxation,"  in 
the  Annals  of  the  American  Academy  of  Political  ami  Social  Science,  iii  (1893), 
pp.  444-463,  The  statement  in  the  text  differs,  however,  in  some  important 
points  from  that  uf  Professor  Ross. 


2  54  Shifting  and  Incidence  of  Taxation 

5.  If  the  demand  is  persistent,  the  producers  will  roll  the 
tax  upon  the  consumers  through  a  rise  in  price.  But  if  the 
demand  is  sensitive,  the  producers  will  bear  more  of  the  tax, 
or  else  some  will  migrate. 

6.  If  different  parts  of  the  supply  of  a  commodity  are  pro- 
duced at  greatly  varying  costs,  the  less  efficient  producers 
will  be  ruined  by  a  tax  which  the  abler  producers  can  readily 
pay. 

7.  If  the  commodity  is  supplied  at  decreasing  cost,  the 
tendency  is  that  the  consumer  will  be  likely  to  suffer  more 
than  in  the  case  of  an  industry  subject  to  the  law  of  constant 
or  increasing  cost. 

8.  To  the  extent  that  a  tax  reaches  the  surplus  rather  than 
the  margin,  shifting  will  be  less  likely  to  result,  since  price 
tends  to  adjust  itself  to  marginal  cost. 

9.  The  smaller  the  tax,  the  less  will  be  the  disarrangement 
in  the  equilibrium  of  supply  and  demand,  and  the  slighter 
will  be  the  normal  action  that  will  produce  or  prevent 
shifting. 

10.  If  the  tax  is  graduated  instead  of  proportional,  the 
tendency  toward  shifting  will  be  accentuated  or  weakened 
according  to  the  rate  of  the  progression  or  regression. 

11.  If  the  object  is  a  final  good,  a  tax  once  shifted  to  the 
consumer  will  stay  there.  But  if  it  be  a  commodity  used  in 
further  production,  the  whole  case  is  reopened,  and  all  the 
other  conditions  may  come  in  to  determine  whether  or  not 
the  tax  shall  be  shifted  to  the  second,  the  third  or  the  final 
consumer. 


CHAPTER   II 
Taxes  on  Agricultural  Land 

The  assertion  is  frequently  made  that  the  American  farmers 
are  taxed  out  of  all  proportion  to  their  ability  to  pay.  This 
is  due  chiefly  to  the  fact  that  they  have  to  assume  to  a  large 
extent  the  burdens  of  other  taxpayers.  Outside  of  the  rural 
districts  the  great  mass  of  personal  property  consists  of  in- 
tangible personalty,  which,  as  a  rule,  escapes  taxation  almost 
completely.  In  the  rural  districts,  on  the  other  hand,  the 
great  mass  of  personalty  consists  of  visible  tangible  property 
used  by  the  agricultural  communities.  The  country  land- 
owner, who  is  generally  assessed  also  on  his  visible  person- 
alty, must  thus  pay,  over  and  above  his  just  proportion  of  the 
public  dues,  an  additional  share  which  ought  to  have  been 
assumed  by  the  owners  of  intangible  personalty.  What  is  a 
real  property  tax  in  the  rest  of  the  state  becomes  a  general 
property  tax  for  the  farmer.^ 

The  force  of  this  contention  is  denied  in  the  commonly 
accepted  doctrine  that  the  tax  on  the  farmer's  property  is 
diffused  throughout  the  community.  The  farmer,  it  is  said, 
will  add  the  tax  to  the  prices  of  the  products  of  his  farm,  and 
will  in  this  manner  recoup  himself  for  his  original  outlay. 
The  tax  will  thus  be  shifted,  so  runs  the  argument,  from  the 
producer  to  the  consumer  ;  since  every  one  is  a  consumer, 
the  tax  will  virtually  fall  on  the  community  at  large,  and  is 
hence  a  just  and  equal  tax. 

This  argument  is  not  a  strong  one,  although,  strange  to 
say,  its  chief  weakness  has  not  hitherto  been  pointed  out. 

^  Cf.  the  article  on  "  The  General  Property  Tax,"  in  Seligman,  Essays  in  Taxa- 
tion, pp.  27-33. 


256  Shifting  and  Incidence  of  Taxation 

Even  granting  for  the  moment  that  the  tax  will  be  shifted 
in  its  entirety,  by  being  added  to  the  prices  of  agricultural 
products,  it  would  fall  on  individuals  only  so  far  as  they  were 
consumers  of  these  products.  In  other  words,  if  this  were 
the  only  tax,  it  would  be  a  tax  on  consumption  —  that  is, 
on  expense.^  Now,  of  all  bases  of  taxation  expenditure  is 
undoubtedly  the  least  equitable.  What  a  man  spends  is  no 
criterion  of  what  he  is  able  to  contribute  to  the  burdens  of 
the  state.  It  bears  no  fixed  proportion  to  taxable  capacity. 
Whatever  other  tests  we  may  have  of  individual  faculty  — 
whether  property,  product  or  income  —  not  one  of  these  has 
any  definite  relation  to  expenditure.  If  one  man  has  triple 
the  property  or  income  of  another,  but,  whether  through 
thrift  or  miserliness,  spends  only  the  same  amount,  it  surely 
cannot  be  said  that  the  taxable  capacity  of  the  latter  is  equal 
to  that  of  the  former,  especially  if  the  latter  spends  up  to 
a  very  narrow  margin  of  his  revenue,  as  frequently  occurs. 
In  the  one  case  there  is  available  for  future  exigencies  a 
reserve  fund  which  is  entirely  lacking  in  the  other,  that 
completely  alters  its  owner's  obligations  to  the  community. 
Moreover,  it  is  a  well-known  fact  that  differences  in  expendi- 
tures are  rarely  so  great  as  differences  in  property  or  income. 
A  tax  on  consumption  alone  would,  therefore,  fall  with  in- 
creasingly crushing  force  on  all  those  classes  whose  expenses 
swallow  up  almost  their  respective  income,  or  perhaps  even 
encroach  on  their  capital.  It  is  not,  of  course,  here  intended 
to  argue  against  the  advisability  of  taxes  on  consumption  as 
a  part,  and,  because  of  certain  other  advantages,  even  a 
desirable  and  necessary  part,  of  a  tax  system.  The  above 
contention  is  directed  against  expenditure  as  the  theoretical 
basis  of  all  taxation.  A  tax  on  real  estate  alone  is,  accord- 
ing to  this  doctrine  of  incidence,  a  tax  on  expenditure.  It 
reaches  only  the  poorer  classes  of  society,  and  exempts  in 
ever  increasing  proportion  the  earnings  or  the  property  of 

^  This  was  seen  in  the  seventeenth  century  by  Sir  William  Petty,  who  said : 
"  A  land  tax  resolves  itself  into  an  irregular  excise  upon  consumption,  that  those 
bear  it  most  who  least  complain."     See  above,  p.  27. 


Taxes  on  Agricultural  Land  257 

the  wealthy.  So  far  as  the  farmers  themselves  belong  to  the 
poorer  classes  they  would  bear  a  disproportionate  share  of  the 
burdens.  Thus  the  single  tax  on  real  estate,  if  it  were  diffused 
throughout  the  community,  would  be  most  unjust  and  oppres- 
sive. In  reality,  however,  there  is  no  such  general  shifting : 
the  tax  on  the  rural  landowner  often  tends  to  stay  where  it 
is  put. 

The  question  of  the  incidence  of  the  land  tax  presents 
comparatively  few  difficulties.  Since  the  time  of  Ricardo  it 
has  been  treated  frequently  and,  on  the  whole,  with  success. 
But  it  is  remarkable  that  the  writer  who  has  discussed  the 
subject  with  the  greatest  clearness  and  subtlety  from  the 
abstract  point  of  view  —  the  Spanish  economist,  Florez- 
Estrada  —  should  have  remained  practically  unknown  to  this 
day.^  Nevertheless,  both  Florez-Estrada's  and  Ricardo's 
doctrines  require  some  qualification  in  order  to  fit  them  to 
the  actual  conditions  of  every-day  life. 

Theoretically,  there  may  be  five  different  kinds  of  land 
taxes : — 

1.  A  tax  on  economic  rent. 

2.  A  uniform  tax  according  to  the  quantity  or  the  quality 
of  the  land. 

3.  A  tax  on  gross  produce. 

4.  A  tax  on  agricultural  profits. 

5.  A  tax  on  property  or  the  selling  value  of  the  land.^ 

I.    A    Tax  on  Economic  Rent 

If  land  is  taxed  according  to  its  pure  rent,  virtually  all 
writers  since  Ricardo  agree  that  the  tax  will  fall  wholly  on 

*  Curso  di  Economia  Politica.  Por  Don  Alvaro  Florez- Estrada.  London, 
1828,  2  vols.  The  quotations  are  from  the  sixth  edition,  published  in  Madrid, 
1848.  An  excellent  French  translation  was  made  by  L.  Galil^ert,  under  the  title 
Cours  Eclectique  J'' Economic  Politique  hrit  en  Espagnol,  and  published  in  three 
volumes  in  Paris,  1833.  Pantaleoni  is  the  only  writer  who  has  referred  to  Florez- 
Estrada.      Rut  he  makes  little  efTort  to  qualify  any  of  the  conclusions. 

"^  Morez-Estrada  makes  a  slightly  difTerent  division.  Ibid.,  part  iv,  "  Del  Con- 
sumo  de  la  Riciueza,"  cap.  v,  '  De  la  Contribucion  sobre  la  propriedad  territorial,' 
ii,  p.  328;   in  the  French  translation,  iii,  p.  223. 


258  Shifting  and  Incide^ice  of  Taxation 

the  landowner,  and  that  it  cannot  be  shifted  to  any  other 
class.  Since  land  on  the  margin  pays  no  rent,  and  the  cost  of 
the  produce  adjusts  itself  to  that  on  the  no-rent  land,  a  tax 
on  rent  cannot  affect  the  price  of  agricultural  produce,  and 
therefore  cannot  be  shifted.  The  point  is  so  universally 
accepted  as  to  require  no  further  discussion.^ 

The  further  question  as  to  how  far  the  tax  on  rent  may  be 
regarded  as  a  burden  on  the  owner,  has  been  discussed  above 
in  treating  of  the  phenomenon  of  capitalization.  It  will  be 
remembered  that  when  the  rate  of  the  tax  exceeds  that  of 
other  taxes,  the  difference  is  not  borne  by  the  new  purchaser, 
but  falls  entirely  upon  the  original  owner.  A  permanent  tax 
on  rent  is  thus  not  shifted  to  the  consumer,  nor  does  it  rest 
on  the  landowner  who  has  bought  since  the  tax  was  imposed. 

A  tax  on  pure  rent,  however,  is  very  rare.  The  more 
difficult  questions  arise  when  the  tax  is  assessed  so  as  to 
include  not  only  the  rent  of  the  landowner  but  the  profits 
of  the  tenant  farmer,  or,  as  the  case  would  be  in  America, 
where  landowner  and  farmer  are  one,  where  the  tax  is 
assessed  according  to  the  value  of  the  property.  For  the 
market  price  of  land  is  equal  to  the  capitalized  value  of  its 
economic  rent  plus  the  profits  of  agricultural  capital. 

Ricardo  maintained  that  if  a  land  tax  is  assessed  on  all  land 
indiscriminately,  or  if  it  is  proportioned  to  the  quality  of  the 
land,  it  will  always  be  a  tax  on  produce,  and  will  consequently 
raise  prices  to  the  consumer.  This  doctrine  has  generally 
been  adopted  by  his  successors.  In  reality,  however,  the 
matter  is  not  so  simple. 

Let  us  consider  the  cases  in  turn,  taking  up  next  — 

^  Ricardo,  Principles,  chap.  10.  We  can  here  only  allude  to  the  incidence  of 
a  tax  on  particular  kinds  of  rent.  Abstractly,  it  would  be  possible  to  tax  land 
suitable  for  raising  a  special  crop,  and  to  exempt  it  as  soon  as  it  were  used  for 
some  other  crop.  Such  a  tax  on  rent  would  be  akin  to  a  tax  on  the  profits  of 
some  particular  occupation,  and  would  tend  to  be  shifted  to  the  consumer.  But 
such  a  tax  on  rent  is  hardly  more  than  a  hypothetical  case.  Moreover,  the 
possibility  of  using  land  for  different  purposes  has  led  to  a  modification  of  the 
older  doctrine  that  rent  does  not  enter  into  price.  Cf.  Seligman,  Principles  of 
Economics,  4th  ed.,  1909,  pp.  376-379. 


Taxes  on  Agricultural  Land  259 

2.    A  Uniform  Tax  accordijig  to  the  Quantitj  or  the  Quality 

of  the  Land 

In  this  case  there  are  four  possible  results,  namely :  (i)  not 
only  the  tax  but  a  sum  over  and  above  the  tax  may  be  shifted 
to  the  consumer;  (2)  the  exact  amount  of  the  tax  may  be 
shifted  to  the  consumer ;  (3)  the  tax  may  be  divided  between 
the  producer  and  the  consumer ;  (4)  the  tax  may  fall  entirely 
on  the  landowner.^ 

The  first  case  would  be  that  of  a  fixed  tax  of  so  much  per 
acre  without  distinction  of  value,  as  was  true  in  some  of  the 
American  commonwealths  in  the  eighteenth  century,  espe- 
cially Vermont  and  North  and  South  Carolina.  Suppose 
that  there  are  three  tracts  of  land  producing  wheat  of  the 
same  quality,  but,  as  a  result  of  differences  in  fertility,  yield- 
ing respectively  ten,  twenty  and  thirty  bushels  to  the  acre ; 
and  suppose  further  that  this  quality  of  wheat  is  worth  50 
cents  a  bushel.  Tract  A  would  thus  yield  $5.00  an  acre, 
tract  B  ;^ 1 0.00  and  tract  C  $15.00.  If  a  tax  of  50  cents  an 
acre  is  imposed  on  all  the  land,  the  owner  of  tract  A  will 
have  to  obtain  for  his  produce  $5.50  or  cease  cultivating. 
But  if  the  price  of  ten  bushels  is  $5.50,  the  price  of  the 
twenty  bushels  produced  on  tract  B  will  have  to  be  $11.00, 
and  that  of  the  thirty  bushels  on  tract  C  $16.50,  since  the 
price  of  the  bushel  will  always  be  fixed  by  the  expenses  of 
cultivation  on  tract  A  —  that  is,  55  cents.  The  owner  of 
tract  B  will  thus  pay  in  taxes  50  cents  more  than  before, 
but,  assuming  that  the  demand  is  constant,  will  obtain  from 
the  public  $1.00  more  than  before,  that  is,  he  will  make  the 
consumer  pay  to  him  something  more  than  the  amount  of 
the  tax.  Again,  the  owner  of  tract  C  will  pay  in  taxes  50 
cents  more  than  before,  but  will  obtain  from  the  public  $1.50 
more  than  before.  A  uniform  tax  on  quantity,  therefore, 
inevitably  takes  out  of  the  pockets  of  the  consumers  more 
than  it  puts  into  the  hands  of  the  tax  collector.^ 

^  Cf.  Florez- Estrada,  op.  cit.;  French  translation,  iii,  pp.  221  et  seq. 
•  Ricardo  called  attention  to  this  in  chapter  xii  of  his  Principles. 


26o  Shifting  afid  Incidence  of  Taxation 

The  second  case  occurs  when  the  tax  is  not  laid  uniformly 
according  to  the  quantity  of  land,  but  is  graded  at  various 
rates  per  acre  according  to  the  quality  of  the  land  —  as,  for 
instance,  in  Kentucky  and  Connecticut  during  colonial  times. 
Thus,  if  in  the  above  case  the  tax  per  acre  on  grade  A  were 
50  cents,  on  grade  B  j^i.oo  and  on  grade  C  ^1.50,  then  not 
only  would  the  price  of  wheat  remain  as  before  at  55  cents 
per  bushel,  but  the  amount  of  taxes  paid  by  the  landowners 
would  exactly  equal  the  increased  price  obtained  from  the 
consumers.  Hence,  whenever  a  land  tax  is  graded  so  as  to 
follow  with  precision  the  differential  advantages  of  produc- 
tion, and  where  the  land  is  cultivated  intensively  up  to  the 
point  when  the  law  of  diminishing  returns  becomes  effective, 
given  a  constant  demand,  the  tax  will  be  shifted  entirely  to 
the  consumers,  without  causing  them  any  additional  loss.  In 
practice,  of  course,  such  gradation  of  the  tax  has  always  been 
very  rough,  so  that  it  is  very  unlikely  that  the  exact  amount 
of  the  tax  will  be  shifted  to  the  consumers. 

The  third  case  —  that  of  a  division  of  the  tax  between  the 
producer  and  the  consumer  —  arises  when  the  graded  acreage 
tax  is  imposed  in  such  a  manner  that  the  progression  of  the 
tax  exceeds  the  augmentation  in  price.  If,  for  example, 
grade  A  were  assessed  at  50  cents,  grade  B  at  ^1.25  and 
grade  C  at  $2  per  acre,  the  consumers  would  still  have  to  pay 
more  than  before  the  imposition  of  the  tax,  but  the  owners  of 
grades  B  and  C  would  make  less  profits  than  before.  The 
degree  in  which  the  landowner  and  the  consumer  would  share 
the  tax  would  depend,  other  things  being  equal,  on  the  rate 
of  the  graduation  or  progression  of  the  tax. 

Finally,  the  fourth  case  —  that  of  the  tax  resting  entirely 
on  the  landowner  —  would  occur  on  the  supposition  (which 
manifestly  is  purely  hypothetical)  that  the  lands  of  inferior 
quality  were  free  of  tax.  For  since  such  lands  fix  the  price 
of  wheat,  the  owners  of  better  lands  could  not  raise  the  price ; 
and  since  the  tax  is  imposed  on  acreage,  the  tax  would  simply 
represent  a  diminution  of  their  revenue. 

So  much  for  the  fixed  tax  per  acre  of  land  according  to 


Taxes  on  Agricultural  Land  261 

quantity  or  quality  —  a  tax  that  is  to-day  virtually  unknown 
in  advanced  communities. 


3.    A    Tax  on   Gross  Produce 

The  most  familiar  example  of  a  land  tax  on  gross  produce 
is  the  tithe.  The  incidence  of  a  land  tax  on  gross  produce 
has  been  most  clearly  discussed  by  John  Stuart  Mill,^  who  at 
first  followed  Ricardo  in  holding  that  a  tithe,  because  it  is 
imposed  on  land  of  all  qualities,  reduces  corn  rents  in  equal 
proportions ;  but  that  in  the  same  proportion  as  corn  rent  is 
reduced  in  quantity,  the  corn  composing  it  is  raised  in  value. 
The  producer  at  the  margin  of  cultivation,  then,  pays  one- 
tenth  of  his  produce  in  kind,  but  since  all  prices  are  fixed  by 
his  produce,  his  nine-tenths  will  sell  for  as  much  as  the 
whole  ten-tenths  previously  sold  for.  At  first,  therefore,  a 
tithe  would  be  shifted  to  the  consumers. 

As  Senior  has  shown,  however,  this  would  be  only  the 
immediate,  not  the  ultimate,  effect.'^  The  final  result  would 
be  not  an  increase  of  price,  but  a  diminution  of  production 
and  therefore  a  deduction  from  rent.  It  would  ultimately  be 
a  burden,  not  to  the  consumers,  but  to  the  producers ;  for  the 
higher  price  of  food  and  of  raw  material  would  tend  to  check 
the  progress  of  the  community,  and  to  lower  to  that  extent 
the  demand  for  land.  This  point  has  been  demonstrated  so 
clearly  by  both  Senior  and  Mill  that  it  is  not  necessary  to 
repeat  their  arguments,  so  familiar  to  all  English-reading 
students.  Moreover,  von  Thiinen  has  pointed  out  that  the 
question  whether  a  land  tax  is  shifted  to  the  consumers 
depends  largely  upon  the  character  of  the  population  as  con- 
sumers. In  poor  countries  a  land  tax  would  not  be  shifted 
even  in  first  instance  to  the  consumers,  because  they  could 
not  afford  to  pay  more.     Such  a  tax  would,  then,  simply  lead 

^  This  is  true,  however,  only  of  the  later  editions,  where  Mill  accepted  the  cor- 
rections  of  Senior.      Cf.  his  Principles  of  Political  Economy,  book  v,  chap,  iv, 

§§  3.  4- 

■^  Political  Economy.     By  Nassau  W.  .Senior.     6th  ed.,  1872,  pp.  122-125. 


262  Shifting  a7id  Incidence  of  Taxation 

to  a  lowering  of  the  standard  of  life  of  the  consumers,  and  to 
a  decrease  in  the  prosperity  of  the  producers.^ 

Finally,  the  validity  of  the  doctrine  that  the  tithe,  even  in 
its  immediate  result,  is  shifted  to  the  consumer  depends  on 
the  assumption  that  the  tax  is  a  universal  tax,  applicable  to 
all  the  land.  This  is  not  necessarily  true.  To-day,  for  ex- 
ample, in  England,  owing  to  the  process  of  commutation  of 
tithe,  only  part  of  the  land  is  still  tithable,  so  that,  as  in 
the  case  of  all  partial  taxes,  the  burden  is  borne  by  the 
producer  and  not  by  the  consumer.  Even  if  all  the  land 
were  tithable,  the  presence  of  international  competition,  as 
will  be  shown  later,  would  render  the  tithe  virtually  a  partial 
tax  and  thus  not  susceptible  of  being  shifted  to  the  consumer. 
Wherever  the  tax  on  gross  produce  still  exists  in  civilized 
countries,  it  can  no  longer  be  regarded  as  one  that  is  neces- 
sarily shifted  to  the  consumer. 

4,  5.    A  Tax  assessed  according  to  Net  Profits,  or  the  Selling 
Value  of  the  Property 

These  two  bases  of  the  tax  are,  as  has  already  been  indi- 
cated, equivalent ;  for  the  selling  price  of  agricultural  land  is 
nothing  but  the  capitalized  value  of  the  net  profits  ordinarily 
derived  from  its  use.  Theoretically  there  may  be  two  cases  : 
either  the  land  tax  is  a  part  of  a  wider  system  which  taxes 
also  all  other  net  profits  or  all  other  capital  or  property ;  or 
the  land  tax  is  a  single,  exclusive  tax,  while  other  profits  or 
other  classes  of  property  are  exempt. 

In  the  case  of  a  general  tax  on  profits,  or  that  of  a  general 
property  tax,  it  is  difficult  to  see  how  the  land  tax  can  be 
shifted  to  the  consumer.  The  theory  of  its  complete  shifting 
to  the  consumer  assumes  that  the  landholder  at  the  margin 
of  cultivation  will  otherwise  abandon  his  farm,  after  the 
imposition  of  the  tax,  and  transfer  his  capital  and  labor  to 
some  other  occupation.     But   to    this   argument   it   may  be 

^  Der  isolirie  Staat.  Von  Johann  Heinrich  von  Thiinen,  1826,  pp.  259-269. 
[2d  ed.,  Erster  Theil,  1875,  PP-  326-339-] 


Taxes  on  Agricultural  Land  263 

objected  that,  if  all  other  profits  or  property  are  equally 
taxed,  he  will  gain  nothing  by  such  a  transfer.  In  fact, 
under  a  general  tax  there  will  be  no  inducement  for  him  to 
abandon  his  farm.  Since  the  supply  will  thus  not  be  dimin- 
ished, prices  will  consequently  not  rise.  If,  therefore,  a  tax 
on  landed  profits  or  landed  property  were  simply  a  part  of  a 
general  income  tax  or  of  a  general  property  tax,  there  would 
be  no  shifting  of  the  tax.  It  would  tend  to  stay  where  it 
was  placed  in  first  instance. 

It  may  be  asserted,  however,  that  our  property  tax  is 
general  only  in  name,  since  personal  property,  as  has  been 
indicated  above,  is  virtually  exempt  from  taxation  outside 
of  the  rural  districts.  It  may  further  be  said  that  Ricardo 
and  the  other  English  authors  discussed  this  form  of  the  tax 
on  the  assumption  that  it  was  an  exclusive  tax.  Nevertheless, 
it  may  be  affirmed  that,  even  on  the  assumption  that  the  tax 
on  agricultural  profits  or  real  estate  is  an  exclusive  tax,  it  does 
not  necessarily  follow  that  this  will  be  shifted  to  the  consumer. 

Ricardo's  theory  would  hold  good  only  on  two  conditions : 
first,  that  there  was  absolute  mobility  of  capital  and  labor; 
and  second,  that  the  community  in  question  was  so  isolated 
that  the  farmers  could  fix  the  price  of  their  own  produce. 
In  actual  life,  however,  these  conditions  are  far  from  being 
really  existent. 

What  really  confronts  us  is  the  existence  of  economic  fric- 
tion. While  most  economists  are  willing  to  admit  that  friction 
exists,^  its  influence  in  the  application  of  abstract  laws  to  actual 
conditions  has  unfortunately  been  entirely  too  much  neglected. 
Yet,  as  it  has  been  vigorously  put :  "  Economic  friction  in- 
cludes everything  that  is  of  practical  importance."  ^ 

^  The  ordinary  view  is  represented  in  the  following  apt  illustration  of  Professor 
Marshall  :  "Such  adjustments  obscure  the  incidence  of  agricultural  rates,  as  the 
eddies  of  a  wind  rushing  past  a  house  will  often  carry  snowflakes  upwards,  over- 
bearing, but  not  destroying,  the  tendency  of  gravitation." —  Royal  Commission 
on  Local  Taxation.  Metnoranda  chiefly  relating  to  the  Classification  and 
Incidence  of  Imperial  and  Local  Taxes,  1899,  p.  122.  This  will  be  hereafter 
quoted  as  Memoranda. 

2  J.  S.  Nicholson.    RaUs  and  Taxes  as  affecting  Agriculture.     1905,  p.  123. 


264  Shifting  aiid  Incidence  of  Taxation 

The  classical  theory  rests  on  the  assumption  that  the  owner 
of  the  worst  land  in  cultivation  will  abandon  the  land  rather 
than  cultivate  it  at  a  loss ;  and  that  the  decrease  of  supply 
will  raise  prices  to  the  consumer.  It  is,  however,  incontro- 
vertible that  an  increase  of  price  often  leads  to  a  decrease  of 
consumption,  which  again  reacts  upon  the  price,  so  that  at 
best  only  a  portion  of  the  tax  may  be  shifted  to  the  consumer. 
This  point  has  been  fully  explained  in  the  chapter  on 
general  principles.  Furthermore,  it  is  in  actual  life  fre- 
quently a  difficult  matter  for  producers  to  decrease  the  supply 
of  agricultural  products.  To  those  acquainted  with  the  con- 
ditions under  which  the  cotton  crop  is  grown  in  the  Southern 
States  of  the  American  Union,  this  is  a  familiar  matter. 
Although  annual  conventions  of  the  cotton  growers  repeat- 
edly resolve  that  the  low  price  of  cotton  is  due  to  over-pro- 
duction, and  that  the  supply  should  be  curtailed,  it  seems 
practically  impossible  to  reduce  the  cotton  acreage.  In  order 
that  any  appreciable  influence  might  be  felt  in  the  price,  it 
would  be  necessary  for  whole  tracts  of  the  lands  at  the  margin 
of  cultivation  to  be  abandoned,  or  to  be  used  for  some  other 
purpose.  Now  this  practically  means  wholesale  ruin  for 
immense  classes,  who  have  perhaps  invested  large  sums  in 
improving  the  land,  which  they  consider  fit  for  only  that  par- 
ticular purpose.  Rather  than  abandon  the  land  they  will 
often  prefer  to  continue  cultivation  at  a  remuneration  which 
will  just  cover  bare  living  expenses,  hoping  for  a  change  in 
the  market.  In  other  words,  the  tax  would  often  merely  de- 
grade the  cultivators.  Only  when  the  tax  is  so  exorbitantly 
high  as  to  swallow  up  the  whole  rent,  or  all  the  agricultural 
profits,  so  as  to  leave  the  cultivator  an  inadequate  margin  for 
living  expenses,  will  he  abandon  the  land  in  such  large  quan- 
tities as  to  effect  a  material  decrease  of  the  supply.  But  such 
a  tax  is  unusual  in  civilized  communities.^ 

1  This  view  is  accepted  by  Professor  Nicholson  in  his  Rates  and  Taxes  as 
affecting  Agriculture.  London,  1905.  Professor  Nicholson  points  out  that  a 
large  part  of  the  rent  "  is  quite  different  from  the  economic  rent  of  pure  theory," 
and  is  really  like  industrial  profits  (p.  128).     It  "follows  that  a  tax  or  rate  that 


Taxes  on  Agricultural  Land  265 

In  other  words,  a  tax  on  the  landowner,  if  it  be  not  extor- 
tionate, will  simply  reduce  his  profits.  In  proportion  as  the 
theory  of  the  absolute  mobility  of  capital  from  agriculture  to 
commerce,  or  from  one  kind  of  agricultural  investment  to 
another,  is  attended  with  practical  difficulties,  the  process  of 
shifting  the  tax  to  the  consumer  will  be  impeded. 

It  will  be  said,  however,  that  a  rise  of  price  may  be  brought 
about  not  only  by  an  actual  diminution  of  the  produce,  but  by 
a  relative  diminution,  i.e.  by  a  failure  of  the  cultivators  to  in- 
crease the  acreage  in  the  face  of  an  augmented  demand.  To 
this  it  may  be  replied  that  in  old  countries  the  operation 
of  the  law  of  diminishing  returns  will  prevent,  or  at  all  events 
impede,  any  great  or  sudden  increase  of  output.  While  in 
new  countries,  where  an  increase  of  acreage  is  relatively 
easy  to  accomplish  and  where  the  agricultural  prosperity 
that  follows  an  augmented  demand  is  apt  to  be  marked,  the 
imposition  of  a  tax  will  prevent  the  increase  of  supply  only 
where  the  tax  is  so  high  as  to  absorb  the  whole  difference 
between  the  old  and  the  new  margin.  This,  however,  is  very 
unusual.  So  that  it  may  be  said  that  the  forces  which  im- 
pede the  transfer  of  a  land  tax  to  the  consumer  are  operative 
in  case  both  of  an  actual  and  of  a  relative  restriction  of  the 
output. 

Secondly  and  more  important,  the  Ricardian  theor)'  as- 
sumes a  completely  isolated  community.  In  actual  life,  how- 
ever, the  market  value  of  agricultural  produce  is  fi.ved  by  the 
conditions  of  production  in  widely  separated  localities  or 
countries.  The  imposition  of  a  tax  on  the  landowner  of  any 
one  particular  locality,  therefore,  cannot  change  the  price  of 

falls  on  this  part  must  have  the  same  effect  as  a  tax  on  any  similar  form  of  indus- 
trial profit."  Again,  as  Professor  Nicholson  puts  it,  "  owing  to  the  large  amount 
of  fixed  capital  in  agriculture,  including  the  improvements  fwcd  in  the  land,  it 
will  pay  for  a  long  time  to  work  the  land  in  some  way,  so  as  to  avoid,  at  any  rate, 
a  total  loss.  Landlords  and  farmers  cannot  remove  their  capital  to  mure  flourish- 
ing industries.  Besides  this  fixed  capital,  there  is  also  their  fixed  skill,  and  so 
long  as  any  surplus  at  all  remains  in  the  form  of  gross  rent,  the  land  will  be 
cultivated,  although  it  does  not  give  the  ordinary  interest  on  all  the  capital  sunk 
in  it."     Ibid.,  pp.  132-133. 


266  Shifting  and  Incidence  of  Taxation 

the  product.  The  older  theory  seems  to  have  overlooked  the 
facts  of  international  relations.  If  taxes  precisely  identical 
in  character  and  amount  were  imposed  by  all  countries  on  all 
farmers,  then  indeed,  given  the  complete  mobility  of  capital 
just  discussed,  the  tax  might  be  shifted  to  the  consumer. 
But  this  is  never  the  case.  The  Western  farmer,  the  price 
of  whose  wheat  is  fixed  in  Liverpool  by  the  conditions  of  pro- 
duction in  countries  thousands  of  miles  distant,  will  not  get  a 
whit  more  for  his  products  if  his  taxes  are  doubled.  He,  and 
he  alone,  must  bear  the  burden  of  the  tax.^ 

The  real  considerations  in  the  case  seem  to  be  as  follows. 
Even  if  we  assume  that  the  tax  on  agricultural  land  is  an  ex- 
clusive tax,  then,  in  case  the  land  yields  a  product  the  price 
of  which  is  fixed  in  the  international  market,  so  much  of  the 
assessment  as  is  a  differential  tax  cannot  possibly  be  shifted 
to  the  consumer.  The  remission  of  any  surplus  of  taxation 
over  the  rate  assessed  in  the  competitive  countries  will  enure 
to  the  benefit  of  the  producer.  The  differential  part  of  a  tax 
will  stay  where  it  is  put. 

But  how  about  that  portion  of  the  tax  which  is  common  to 
all  the  countries.''  In  this  case  it  is  necessary  to  distinguish. 
Under  actual  conditions  of  international  competition,  coun- 
tries may  be  divided  into  three  classes  —  marginal,  intra-mar- 
ginal  and  sub-marginal  producers.  At  any  given  time,  the 
price  of  the  product,  according  to  the  commonly  recognized 
theory,  will  be  at  the  point  of  the  greatest  cost  of  production, 
this  marginal  cost  being  the  cost  which  is  just  remunerated  by 
the  price.  The  country  which  can  produce  at  a  lower  cost, 
or  within  the  margin  of  cost,  thus  becomes  the  intra-marginal 
producer,  and  the  difference  constitutes  the  profits  of  produc- 
tion, or  if  we  put  it  in  the  old  terms  and  abstract  from  the 
conception  of  agricultural  profits,  the  economic  rent.  But 
while  the  price  at  any  given  moment  is  influenced  by  the 
highest  cost,  the  tendency  of  prices  is  to  move  in  the  direc- 
tion of  the  lower  cost  of  the  intra-marginal  producer,  who  thus 
comes  to  set  the  pace.^ 

1  Cf.  above,  the  discussion  of  general  principles,  pp.  249-250. 

2  Cf.  Seligman,  Principles  of  Economics,  9th  ed.,  1921,  §§  105-106. 


Taxes  on  Agricultural  Land  267 

This  statement,  however,  is  not  quite  complete  in  that  it 
overlooks  the  fact  that  in  the  production  of  commodities  like 
agricultural  produce  there  are  frequently  periods  of  shorter  or 
longer  duration  when  the  price  does  not  begin  to  remunerate 
the  cost  of  production,  and  where  production  nevertheless 
goes  on.  This  annual  loss,  if  continued,  becomes  converted, 
or  capitalized,  into  a  lower  seUing  (and  rental)  value  of  the 
land.  Thus  in  England,  during  the  latter  part  of  the  nine- 
teenth century,  the  prodigious  quantities  of  wheat  produced 
on  the  virgin  soils  of  North  and  South  America  forced  down 
the  price  not  only  to  the  margin  of  cost  in  England,  but  far 
below  that  margin,  so  that  England  became  one  of  the  sub- 
marginal  producers.  In  England,  where  the  tenant  farmer 
could,  of  course,  not  continue  to  produce  at  a  loss,  the  loss 
was  shifted  to  the  landowner,  who  was  compelled  to  accept 
a  lower  rental.  In  New  England,  where  the  farmer  was  also 
the  owner,  the  continued  series  of  losses  led  after  a  time  to 
the  disappearance  of  the  producer  on  the  "  abandoned  farms." 
In  each  case,  the  periodic  fall  in  land-rents  (or  the  abandon- 
ment of  the  poorest  farms)  led  to  a  new  temporary  margin  of 
cost,  which  was  again  converted  by  the  foreign  competition 
into  a  sub-margin,  leading  to  a  repetition  of  the  process,  until 
after  the  lapse  of  a  long  term  of  years  the  lowest  point  was 
reached. 

This  distinction  between  intra-marginal,  marginal  and  sub- 
marginal  producers,  however,  is  to  be  carried  farther.  It 
applies  not  only  as  between  new  and  old  countries,  but  as 
among  all  countries.  Even  in  a  new  and  fertile  empire,  a 
succession  of  bad  harvests  may  increase  the  cost  per  bushel, 
and  if  coupled  with  a  more  than  compensatory  abundant  cmp 
abroad,  which  results  in  a  fall  in  price,  will  mean  positive 
loss.  Such  a  country  would  thus  become  during  that  period 
a  sub-marginal  producer,  and  the  farmers  would  all  run  into 
debt.  This  is  what  happened  in  the  United  States  during 
the  "bad  years"  of  the  early  nineties,  and  which,  as  is  well 
known,  engendered  the  silver  movement.  The  same  country 
may,  therefore,  be  now  an  intra-marginal,  now  a  marginal  and 


268  Shifting  and  Incidence  of  Taxation 

now  a  sub-marginal  producer,  and  its  agricultural  industry  may 
run  through  the  gamut  from  great  gains  to  great  losses. 

If  now  we  study  the  influence  of  a  tax  which  happens  to 
be  identical  in  all  the  countries  involved,  we  shall  realize  that 
it  may  work  differently  according  to  the  above  conditions. 
Suppose  that  in  three  countries,  A,  B  and  6"  (let  us  say  the 
Argentine,  the  United  States  and  England),  the  cost  of  pro- 
ducing, irrespective  of  taxation,  a  bushel  of  wheat  at  a  given 
time  is  50,  70  and  90  cents,  respectively,  and  that  the  con- 
ditions of  the  market  are  such  that  the  wheat  sells  at  the 
moment  at  70  cents  a  bushel.  If  a  tax  of  5  cents  a  bushel  is 
imposed  in  each  of  these  countries,  what  will  happen  } 

In  the  long  run,  indeed,  the  tendency  would  obviously  be  for 
the  price  to  rise  to  75  cents.  The  long  run,  however,  may  never 
come  to  pass.  The  producers  in  country  A,  who  have  the 
whip  hand,  may  fear  that  if  they  put  up  the  price  to  75  cents 
they  may  spoil  the  market  for  the  next  year,  by  inducing 
country  B  to  increase  its  acreage  or  preventing  C  from  dimin- 
ishing its  output.  This  consideration,  together  with  the  fact 
that  they  are  already  making  large  profits  as  intra-marginal 
producers,  may  lead  the  producers  in  A  to  be  content  with 
the  old  price,  despite  the  tax.  It  is  a  familiar  fact  that  in 
periods  of  prosperity  farmers  are,  as  a  rule,  careless  and 
lavish.  Such  a  tax  may,  therefore,  be  willingly  borne  by 
country  A.  On  the  other  hand,  the  producers  in  B  and  C 
will  be  compelled  to  bear  their  own  taxes  themselves,  because 
they  do  not  control  the  market,  the  price  always  setting  in 
the  direction  of  the  lowest  or  intra-marginal  cost.  If  the  tax 
were  remitted  by  their  own  country,  producers  in  C  would  lose 
less,  and  producers  in  B  might  even  emerge  with  a  shght  gain. 

It  may,  therefore,  be  maintained  that  even  as  to  that  part 
of  the  tax  which  is  the  same  in  all  countries,  the  producers 
must  bear  the  tax  when  the  country  is  in  the  sub-marginal  or 
marginal  class ;  and  that  the  producers  may  bear  the  tax 
when  the  country  is  in  the  intra-marginal  class.^ 

^  M.  Gaston  Gros,  in  an  interesting  discussion,  argues  that  the  shifting  of  the 
tax  to  the  consumer  depends  on  whether  the  country  is  an  importer  of  food 


Taxes  on  Agricultural  Land  269 

If  we  join  to  the  above  considerations  the  reflection  that  in 
old  (and  generally  sub-marginal)  countries  the  land  tax  is 
likely  to  exceed  the  common  rate,  and  that  in  new  (and  gen- 
erally intra-marginal  countries)  the  land  tax  is  a  part  of  a 
general  property  tax,  we  are  impelled  to  the  conclusion  that 
the  forces  making  for  a  shifting  of  the  tax  to  the  consumer 
are  very  measurably  weakened.  What  is  true,  however,  of 
competition  between  nations  is  equally  true  of  competition 
between  sections  of  the  same  country.  Under  modern  con- 
ditions there  is  a  continually  smaller  range  of  agricultural 
products  which  possess  a  geographical  monopoly  of  the  local 
market.  We  therefore  finally  reach  the  position,  that  under 
actual  conditions  of  economic  life  the  hypothetical  conclu- 
sions of  the  older  theory  must  be  considerably  modified,  and 
that  a  tax  on  the  net  profits  or  selling  value  of  the  land  is 
generally  not  shifted  to  the  consumer.^ 

The  further  query  may  arise  as  to  whether  the  tax,  if  it 
rests  on  the  land,  will  not  be  capitalized  or  amortized  into  a 
lower  seUing  value  of  the  land,  thus  enabling  the  new  purcha- 
ser to  escape  any  burden  by  buying  himself  free  of  the  tax.^ 

{pays  en  deficit  alimeniaire),  an  exporter  of  food,  or  a  self-sufficing  country  {fuys 
en  e<juilibre  alimentaire).  I.'Iinpbt  sur  le  Revenu,  1907,  p.  37.  That  this  is 
not  the  real  criterion,  however,  is  apparent  from  the  fact  that  the  exporting  coun- 
try may  be  either  the  sub-marginal  producer  (as  often  in  France)  or  the  intra- 
marginal  producer  (as  generally  in  America). 

1  Cf.  Nicholson,  Rates  and  Taxes  as  affecting  Agriculture,  1905,  pp.  11 8-1 19: 
"  It  is  easy  to  show  that  under  present  conditions,  the  consumer  will  bear  ver)-  little, 
if  any,  of  the  burden.  He  could  only  be  affected  by  a  rise  in  prices,  and  prices 
are  mainly  dominated  by  foreign  competition.  .  .  .  Practically,  however,  in  England 
at  present,  the  consumer  is  not  affected."  So  Bastable  says:  "On  an  extreme 
hypothetical  view,  it  might  be  argued  that  this  portion  of  the  burden  would,"  in 
the  long  run,  "  be  passed  on  to  the  consumers  of  agricultural  products.  Actual 
conditions  clearly  prevent  \.\{\%:''  —  Afemoranda,\<.  142.  Cf.  Leonard  Courtney  : 
"In  respect  of  all  commodities  which  come  upon  the  market  under  conditions  in- 
dependent of  the  distance  of  the  place  of  origin,  the  consumer  would  almost  imme- 
diately lose  whatever  theoretical  advantages  he  might  appear  to  grasp  at  tirst."  — 
Ibid.,  p.  87.  M.  Gaston  Gros,  Impit  sur  le  Revenu,  p.  37,  also  agrees  that  in 
France  the  consumer  does  not  bear  the  tax. 

2  This  contention  is  frequently  met  with,  and  has  been  advanced,  <•,<;..  by  Mill 
{Principles,  People's  ed.,  p.  494),  Sir  Robert  C.iffen  and  others.  Thus  Sargant 
says  {Memoranda,  p.  213)  :  "  Rates  levied  on  agricultural  land  appear  to  me  to 


270  Shifting  and  Incidence  of  Taxation 

To  this  objection  a  double  answer  can  be  given.  In  the  first 
place,  the  capitalization  or  rent-charge  theory  holds  true  only 
on  the  assumption  that  the  tax  remains  virtually  unchanged 
for  a  term  of  years.  But  a  tax  assessed  on  the  net  profits  or 
the  selling  value  of  agricultural  land  does  not  remain  the  same 
even  though  the  rate  does  not  change,  because  the  profits  and 
value  of  agricultural  land  vary  from  year  to  year,  sometimes 
very  materially.  This,  as  we  shall  see  in  the  next  chapter,  is 
the  principal  distinction  between  agricultural  and  urban  land. 
When,  however,  there  is  no  constancy  in  the  tax,  there  can  be 
no  capitalization.  Secondly,  even  if  capitalization  does  take 
place,  we  must  remember  that  the  new  purchaser  of  agricul- 
tural land  is  rarely  aware  of  the  process  or,  if  he  is  originally 
conscious  of  it,  soon  forgets  it.  His  profits  are  so  entirely 
dependent  on  the  mutations  in  the  price  of  his  produce,  that 
he  invariably  reckons  his  taxes  among  his  outgoings,  and  re- 
sents paying  at  a  higher  rate  than  do  the  owners  of  other 
property.  The  statesman  cannot  afford  to  ignore  this  psy- 
chological fact  in  framing  his  budget.^ 

In  fact,  if  the  older  theory  were  absolutely  true,  it  would 
be  virtually  impossible  to  make  the  landowners  or  farmers 
suffer  by  any  land  tax,  provided  it  were  not  levied  expressly 
on  pure  economic  rent.     A  country  might  then  raise  its  entire 

fall  practically  exclusively  on  the  owner  or  successive  owners  of  the  land  at  the 
time  when  they  are  first  imposed  or  anticipated."  Even  Marshall  says :  "  Such 
taxes  on  agricultural  land  as  have  been  imposed  for  a  long  time  are  no  direct  bur- 
den on  present  landowners,  farmers,  or  labourers."  —  Memoranda,  p.  1 21. 

1  As  Gaston  Gros  puts  it :  "  payer  des  contributions  plus  I'un  que  I'autre,  c'est 
une  injustice,  et  I'ingeniosite  de  tous  les  theoriciens  se  brisera  contre  cette 
simple  affirmation  du  bon  sens  populaire." — L Impbt  sur  le  Revenu,  p.  40. — 
Cannan  seems  to  forget  this  when  he  says  in  the  National  Review  for  November, 
1896:  "No  one  is  brought  up  in  the  belief  that  he  is  to  inherit  land  or  houses 
free  of  poor  rates.  No  one  buys  lands  or  houses  without  knowing  that  such  things 
exist.  The  man  who  sells  consols  and  buys  lands,  and  then  clamors  for  remission 
of  rates,  is  no  better  than  a  thief"  Cf.  also  his  statement  in  Memoranda,  p.  192. 
—  For  an  extended  argument  against  the  "  hereditary  burden  "  theory  as  appli- 
cable to  agricultural  land  in  England,  see  J.  Row-Fogo,  An  Essay  on  the  Reform  of 
Local  Taxation  in  England,  1902,  pp.  165-182,  and  Nicholson,  op.  cit.,  chaps,  ii 
and  iii. 


Taxes  on  Agricultural  Land  271 

revenue  by  imposing  taxes  on  land  alone,  and  would  in  no 
wise  injure  the  agricultural  interests.  Yet  all  history  has 
proved  the  error  of  this  view.  From  the  day  of  the  exac- 
tions of  the  Oriental  monarchs  and  of  the  later  imperial 
Roman  tax  system  to  the  mediaeval  methods  of  Spain  and 
the  arbitrary  land  tax  of  pre-revolutionary  France,  much  of 
the  misery  of  the  agricultural  classes  must  undoubtedly  be 
attributed  to  the  revenue  system  which  burdened  primarily 
the  farmer.  Implicit  reliance  on  the  Ricardian  doctrine 
might  justify  every  exaction  on  the  farmer,  but  would  in- 
evitably react  on  agricultural  prosperity.^ 

Our  conclusion,  hence,  is  that  under  actual  conditions  in 
America  to-day  the  landowner  may  virtually  be  declared  to 
pay  in  last  instance  the  taxes  that  are  imposed  on  his  land. 
At  all  events,  it  is  erroneous  to  assume  any  general  shifting 
to  the  consumer.  To  the  extent  that  our  land  tax  is  a  part  of 
a  general  property  tax,  it  cannot  possibly  be  shifted ;  to  the 
extent  that  it  is  more  or  less  an  exclusive  tax,  it  is  even  then 
apt  to  remain  where  it  is  first  imposed  —  namely,  on  the 
landowner. 

In  England,  where  the  farmer  is  almost  universally  the 
tenant  and  not  the  landowner,  and  where  the  rural  tax,  or 
rate  as  it  is  called,  is  levied  according  to  rental  value  and  im- 
posed on  the  occupier,  the  question  is  primarily  as  to  the 
incidence  of  the  tax  between  the  landowner  and  the  tenant. 
Much  the  same  is  true  of  the  other  European  countries  where 
the  peasants  or  farmers  are  not  the  owners,  although  there  the 
tax  is  frequently  assessed  on  the  owner  rather  than  the  tenant. 

The  ordinary  doctrine  which  played  such  a  great  role 
at  the  close  of  the  nineteenth  century  in  England  is  that 
the  tax  on  agricultural  rents  falls  on  the  landowner.  The 
reasoning  is  simple.  At  any  given  time,  when  the  tenant 
makes  out  his  lease,  he  makes  allowance  for  the  taxes 
which    are    collected    from    him.     The    rent    which    he    is 

^  Cf.  De  la  Monnaie,  du  Credit,  et  de  r Impbt.  Par  Gustave  du  Puynode, 
ii,  p.  153. 


272  Shifting  and  Incidence  of  Taxation 

willing  to  give  will  vary  with  the  tax  which  he  is  compelled 
to  pay.  If  the  tax  is  imposed  on  the  owner  instead  of  the 
tenant,  the  same  argument  will  hold  good,  there  being  no 
reason  why  the  owner  should  be  able  to  compel  the  tenant 
to  pay  more.  The  burden  hence  falls  wholly  on  the  land- 
lord. The  force  of  this  general  argument,  however,  is 
attenuated  by  three  considerations  :  the  fact  of  new  or 
increased  rates,  the  existence  of  a  real  competitive  rent, 
and  the  character  of  the  rent  itself. 

The  first  point  is  this.  It  may  happen  that  after  a  lease 
has  been  made  out  an  increase  in  the  rates  takes  place. 
Where,  as  in  England,  the  tenant  farmer  advances  the  tax, 
the  increase  must  necessarily  be  borne  by  him  until  the 
expiration  of  the  lease.  It  may  be  contended  that  this  con- 
sideration is  of  slight  consequence,  because  in  the  long 
run  the  tenant  will  insist  on  an  allowance  for  the  increase 
when  a  new  lease  is  taken.  Tenants,  however,  it  must  be 
remembered,  deal  with  short-run,  not  with  long-run,  con- 
ditions, and  if  the  land  is  leased  for  a  comparatively  pro- 
tracted period  the  occupier  will  undoubtedly  suffer  in  the 
interval.  Ultimately,  however,  it  may  be  conceded,  the 
landowner  will  be  compelled  to  decrease  the  rent. 

In  the  second  place,  the  conclusion  in  the  last  sentence  rests 
on  the  assumption  that  the  rent  is  a  true  competitive  rent. 
But  this  assumption  is  not  entirely  accurate.  For  in  Eng- 
land most  of  the  farmers  are  charged  less  than  the  purely 
competitive  or  rack  rent.  As  Bagehot  points  out :  "  The 
wish  for  political  power,  for  personal  popularity,  for  social 
deference,  frequently  inclines  an  owner  not  to  charge  all 
he  might  for  his  land.  The  wish  to  be  considered  a  good 
landlord,  and  the  fear  to  be  thought  a  bad  landlord,  are 
powerful  motives.  .  .  .  No  one  can  say  how  far  these 
motives  will  influence  men  or  how  far  they  will  not."  ^ 
It  may,  however,  be  stated  that  in  the  case  of  non-com- 
petitive rents  an  increase  in  the  local  rates  will  fall  on  the 
tenant,  and  not  on  the  landlord.     As  Mr.  Goschen  puts  it, 

^  Editorial  in  the  Economist,  April  15,  1 871,  p.  439. 


Taxes  on  Agricultural  Lajid  273 

"  any  increase  in  local  burdens  must  fall  on  the  margin 
between  the  actual  rent  and  the  rack  rent,  and  so  far  dimin- 
ish the  advantage  derived  by  the  farmer  from  his  actual 
rent  being  below  a  rack  rent ;  until  that  margin  were  ex- 
hausted, it  would  naturally  be  useless  for  him  to  apply  to 
his  landlord  to  readjust  his  rent."  ^  In  the  same  way  a 
remission  of  rates  will  inure  to  the  advantage  of  the  tenant. 

On  the  other  hand,  the  recent  depression  of  English  agri- 
culture has  caused  a  change  in  the  opposite  direction.  The 
remarkable  fall  in  prices  during  the  seventies  and  eighties 
not  only  destroyed  the  margin  between  actual  rents  and 
economic  or  rack  rents  but,  in  many  cases,  created  a  margin 
on  the  other  side.  Although  the  farmer  kept  on  struggling 
to  adjust  his  rent  to  lower  prices,  the  movement  was  a  slow 
one ;  and  the  fall  in  actual  rents  did  not  keep  pace  with  the 
fall  of  economic  rent  due  to  these  lower  prices.^  Under  such 
conditions,  a  remission  of  rates  would  be  of  all  the  greater 
advantage  to  the  tenant. 

We  come  finally  to  the  third  point;  namely,  that  most 
land  taxes  are  really  not  taxes  on  rent  at  all.  Under 
actual  conditions  taxes  on  agricultural  land  are  in  great 
measure  taxes  on  agricultural  profits.^  We  are  told  that 
"  over  a  considerable  part  of  England  the  economic  rent 
in    the   strict    sense    has    vanished "  and    that    the    so-called 

^  See  the  analysis  in  Goschen ;  "  Draft  Report  to  the  Select  Committee  on 
Local  Taxation  of  1870,"  in  his  Reports  and  Speeches  on  Local  Taxation,  1871, 
esp.  pp.  165,  166. 

^  Local  Taxation  and  Finance.  By  G.  H.  Blunden.  London,  1895,  P-  42- 
'  Ricardo  himself  realized  this.  Principles,  chap,  xi,  par.  7. —  Professor  Mar- 
shall, in  Memoranda,  p.  1 16,  thinks  that  popular  usage  is  correct  in  treating  the 
income  derived  from  durable  improvements  in  land  as  rent  rather  than  profits, 
"  for  most  purposes."  But  when  he  says  that  a  "  tax  could  not  for  a  long  time 
produce  an  appreciable  effect  on  the  amount  of  such  improvements  nor  therefore 
on  the  supply  of  the  commodity,  —  nor  therefore  on  the  price,"  he  is  considering 
the  incidence  as  between  producer  and  consumer,  not  as  between  landowner 
and  farmer.  And  even  here,  he  thinks  that  the  income  would  be  "  more 
akin  to  profits  than  to  rent  for  the  purposes  of  discussion  as  to  the  ulti- 
mate incidence  of  taxes."  As  to  the  accuracy  of  the  statement  that  a  tax  on 
improvements  could  not  for  a  long  time  produce  an  appreciable  effect  on  such 
improvements,  see  note  on  next  page. 


2  74  Shifting  and  Incidence  of  Taxation 

rent  of  land  "  is,  to  a  great  extent,  simply  profit  on  the 
capital  sunk  in  the  land  by  the  owner,  or  his  predecessors 
in  title."  ^  The  profits  are  divided  between  the  two  parties 
—  the  landowner  receiving  his  rent,  the  tenant  farmer  re- 
ceiving his  share  in  the  shape  of  a  surplus  over  all  out- 
goings. The  incidence  of  a  land  tax  depends  therefore 
largely  on  the  question  as  to  who  is  the  stronger  party  in 
the  struggle  of  shifting.  In  periods  of  prosperity,  where 
the  tenant's  surplus  is  a  large  one  and  the  competition  for 
farms  keen,  the  landlord  will  obviously  be  in  the  better 
position  and  may  be  able  either  to  make  the  farmer  bear 
the  tax  which  is  imposed  on  him,  as  in  England,  or  to  shift  to 
the  farmer  the  tax  which  is  assessed  on  himself,  as  on  the 
continent.  On  the  other  hand,  when  times  are  not  so  pros- 
perous, there  will  be  a  competition  for  tenants  rather  than  for 
farmers,  and  with  the  fall  in  the  tenants'  profits,  the  owner  will 
be  forced  to  accept  a  larger  share  of  the  tax.^  Even  then, 
however,  it  cannot  be  said  that  the  farmer  escapes  injury, 
notwithstanding  the  fact  that  his  rent  decreases  by  the 
amount  of  the  tax.  For  as  the  landlord's  rent  diminishes 
he  is  unable  to  put  as  much  as  usual  into  the  land  in  the 
way  of  permanent  improvements.^  With  this  diminution  in 
the   outlay    on   the    land   the   tenant  will   obviously  earn   a 

1  Nicholson,  i?rt/^^  and  Taxes  as  affecting  Agriculture,  1 905,  p.  124.  Cf.  the 
Final  Report  of  the  Royal  Commission  on  Agriculture,  1898,  p.  26. 

"^  Gaston  Gros  comes  to  the  same  conclusion,  although  he  expresses  himself  a 
little  differently.  The  shifting  of  the  tax,  he  thinks,  depends  on  the  "  etat  mag- 
netique  "  of  agriculture.  In  periods  of  industrial  prosperity,  when  capital  is 
attracted  away  from  agriculture,  the  tax  tends  to  rest  on  the  landowner;  in 
periods  of  agricultural  prosperity,  on  the  tenant  farmer. —  L Impot  sur  le  Revenu, 
p.  37.  Nicholson  puts  the  case  as  follows :  "  The  incidence  of  rates  as  between 
landlord  and  tenant  depends  largely  on  the  relative  mobility  of  the  respective 
capitals;  it  is  a  contest  between  two  sorts  of  profits,  or  an  adjustment  of  two  sorts 
of  losses."     Op.  cit.,  pp.  129-130. 

^  In  England  it  is  estimated  that  nearly  forty  per  cent  of  the  rent  actually 
received  is  spent  by  the  landlords,  partly  for  public  charges  (exclusive  of  income 
tax)  and  partly  for  the  maintenance  of  the  property.  Capital  expenditures  on 
improvements  alone  are  estimated  at  about  twenty  per  cent.  Final  Report  of  the 
Royal  Commission  on  Agriculture,  1898,  pp.  27-28. 


Taxes  on  Agricultural  Land  275 

still  smaller  surplus.  To  all  these  points,  finally,  we  must 
add  the  reflection  that  in  many  cases  the  land  tax  is  not 
a  tax  on  net  produce  at  all,  but  in  its  actual  operation  a 
tax  on  gross  produce ;  ^  and,  as  we  have  seen,  a  tax  on 
gross  produce  is  not  necessarily  shifted  to  the  consumer. 
It  is  considerations  such  as  these  which  have  often  been 
overlooked  by  the  broad  generalizers,  and  which  have  con- 
tributed not  a  little  to  the  scant  courtesy  shown  to  the 
economic  theorist  by  the  practical  man.^ 

We  may  therefore  sum  up  the  discussion  by  stating  that 
under  actual  conditions  the  tax  on  agricultural  land  is  but 
rarely  shifted  to  the  consumer,  and  that,  where  tenant 
farmers  are  found,  the  tax  is  borne  by  either  the  owner 
or  the  tenant,  according  to  the  changing  conditions  of 
agricultural  prosperity.  Even,  however,  where  the  tax  tends 
to  be  borne  by  the  owner,  the  effects  of  the  tax  may  be 
injurious  to  the  tenant.^ 

1  Von  Heckel,  referring  to  the  German  land  tax  says  :  "  Das  praktische  Re- 
sultat  dor  Katastrierung  ist  daher,  dass  sie  mehr  Rohertrags-  als  Reinertrags- 
kataster  liefert,  und  die  Grundsteuer  so  einer  Rohertragssteuer  naher  kommt  als 
einer  Reinertragssteuer."  —  Lehrbuch  der  Finanzwissenschaft,  I  (1907),  p.  261. 

'^This  is  evident  in  much  of  the  evidence  given  before  the  Royal  Commission 
on  Agriculture.  As  Mr.  Rew  puts  it :  "The  overwhelming  testimony  of  occupiers 
of  land  is  that  rates  do  affect  them,  and  that  their  reduction  or  removal  will 
benefit  them,  and  even  if  the  theories  of  political  economy  do  not  endorse  my 
view,  I,  for  one,  prefer  to  rely  on  the  evidence  of  practical  experience."  —  "Local 
Taxation  in  Rural  Districts,"  in  Journal  of  the  Agricultural  Society,  1S96.  Cf. 
also  Row-Fogo,  An  Essay  on  the  Reform  of  Local  Taxation  in  England,  1902, 
p.  169. 

8  This  view  was  accepted  by  the  British  Parliament  when,  in  1896,  by  the 
passage  of  the  Agricultural  Rates  Act  (59  and  60  Vict.  c.  16)  occupiers  of  agri- 
cultural land  were  exempted  from  one  half  of  the  local  rates.  The  act,  however, 
does  not  apply  to  sewers'  or  other  rates,  which  directly  and  measurably  benefit 
the  land,  nor  to  rates  where  agricultural  lands  were  already  charged  a  half,  or 
more  than  a  half,  less  than  buildings,  such  as  the  general  district  rate  in  urban 
districts  or  the  special  expenses  rate  in  rural  districts. 


CHAPTER    III 
Taxes  on  Urban  Real  Estate 

In  the  case  of  city  real  estate  it  is  necessary  to  make  a  dis- 
tinction between  the  two  components  of  the  real  estate  tax, 
the  ground  tax  and  the  building  or  house  tax  —  the  tax  on 
the  site  and  the  tax  on  the  structure ;  for  they  are  governed 
by  distinct  principles.  Strictly  speaking,  we  should  have 
drawn  the  same  distinction  in  the  case  of  the  agricultural 
landowner.  But  in  that  case  the  distinction  is  unimportant, 
because  —  in  America  at  all  events  —  the  tenant  is,  in  almost 
all  cases,  the  owner  and  because  the  value  of  the  farmer's 
buildings  is  generally  of  minor  importance  when  compared 
with  the  value  of  his  land.  So  far  as  this  is  not  true,  how- 
ever, the  principles  now  to  be  discussed  apply  there  also. 

In  American  cities,  where  the  occupiers  of  houses  are  fre- 
quently not  the  owners,  the  real  estate  tax  is  levied  on  the 
owners  of  property ;  and  the  question  of  ultimate  incidence 
concerns  only  the  landlord  and  the  tenant.  In  England, 
where  local  rates  are  levied  as  a  general  rule  on  the  occu- 
piers,^ rather  than  the  owners,  and  are  proportional  not  to 
capital  value  but  to  rental  value,  the  question  is  more  com- 
plicated  because   of    the    pecuHar   divisions    of    ownership. 

^  The  local  rates  in  England  are,  theoretically,  assessed  on  the  occupier.  Even 
for  a  long  period  before  the  Elizabethan  poor  law  (43  Eliz.,  chap,  ii.),  which  is 
the  basis  of  all  English  local  taxation,  it  was  the  occupier,  and  not  the  owner,  on 
whom  fell  the  duty  of  relieving  the  poor.  Cf.  in  general  the  history  of  local 
assessments  in  Castle,  On  Rating,  chap,  i,  and  a  volume  published  by  the  Poor 
Law  Commissioners  in  1846,  entitled  The  Local  Taxes  of  the  United  Kingdom. 
However,  under  the  Small  Tenements  Act  of  1869  (32  and  33  Vict.  chap.  41, 
§§  3>  4)»  wherever  the  ratable  value  does  not  exceed  £,20  in  London,  £,\'^  in 
Liverpool,  ;^io  in  Manchester  or  Birmingham,  or  £Z  elsewhere,  the  owner  may 
compound  for  the  rate  and  may  be  assessed  instead  of  the  occupier.  Further- 
more, by  the  act  of  1850  (13  and  14  Vict.  chap.  99),  whenever  the  tenancy  is  for 
less  than  three  months,  the  occupier  may  deduct  the  rate  from  the  rent.     Under 

276 


Taxes  on    Urbaii  Real  Estate  277 

Thus,  not  only  is  the  occupier  almost  universally  distinct 
from  the  owner  of  the  building,  but  the  owner  of  the  build- 
ing generally  does  not  own  the  land.  Furthermore,  the 
building  owner  usually  does  not  pay  a  ground  rent  to  the 
original  land  owner,  but  pays  only  a  leasehold  ground  rent, 
which  changes  from  time  to  time,  to  the  intermediary  who 
has  leased  the  land  on  a  long  rental  and  at  a  fixed  ground 
rent  from  the  original  owner.  In  such  a  case  the  question 
of  the  incidence  of  rates  concerns  several  parties, — the  land- 
owner, the  leaseholder,  the  building  owner  and  the  occupier.^ 
Such  conditions,  although  rare,  are  not  absolutely  unknown 
even  in  American  cities.  Our  study  of  the  shiftings,  if  true 
at  all,  must  be  applicable  equally  to  the  simple  American 
and  the  complex  English  conditions. 

The  urban  real  estate  tax  is  either  a  pure  land  tax  —  for 
example,  when  laid  on  vacant  lots  —  or  a  tax  on  both  the  land 
and  the  buildings.  The  latter  is  called  in  America  the  real 
estate  tax,  and  on  the  continent  the  house  tax;  but  both  of 
these  designations  are,  from  the  point  of  view  of  economics, 
incorrect.     The  continental  term  is  wrong  because  the  house 

these  two  acts  it  has  now  become  the  practice  for  a  part  of  the  tenement  house 
population,  and  even  for  the  inmates  of  flats  an(i  apartments,  to  have  the  rates 
paid  i)y  the  landlords.  It  has  been  estimated  that  this  is  true  of  about  three 
fourths  of  the  total  number  of  occupiers.  Select  Committee  on  Towti  Holdings, 
1891,  qu.  955. 

'  There  are  four  chief  methods  according  to  which  houses  are  built  in  the  Eng- 
lish cities:  (i)  the  freehold  purchase  system,  where  the  builder  simply  buys  the 
lot  outright;  (2)  the  freehold  rent-charge  system  (called  in  Scotland  the  feu-sys- 
tem and  in  Manchester  the  chief-rent  system),  where  the  landowner  sells  the  land 
to  the  builder  and  has  no  reversionary  interest,  but  reserves  a  perpetual  fixed 
yearly  payment  called  the  rent-charge  or  chief;  (3)  the  long-building-lease  sys- 
tem, where  the  builder  takes  a  lease  for  999  years,  at  a  fixed  annual  rent;  (4)  the 
short-building-lease  system  (or  London  leasehold  system),  where  the  landowner 
leases  the  land  to  the  builder,  or  what  is  known  as  an  "improved  leasehold 
ground  rent."  See  Urban  Rating,  being  an  Inquiry  into  the  Incidence  of  Local 
Taxation  in  Towns.  By  Charles  II.  Sargant.  London,  1890,  chap.  i.  See  also 
Evidence  and  Report  of  Ike  Select  Committee  on  Toivn  Holdings,  1886- 1 890; 
Local  Taxation  and  Finance.  By  G.  IL  Blunden.  London,  1895;  The  History 
of  Local  Rates  in  England.  By  Edwin  Cannan.  London,  1896;  The  Rating  of 
Land  Values.     By  A.  W.  Fox.     London,  1906. 


iy8  Shifting  and  Incidence  of  Taxation 

tax  really  includes  a  tax  on  the  site  as  well  as  a  tax  on  the 
structure.  The  American  term  is  inexact,  because  it  con- 
fuses such  entirely  distinct  taxes  as  the  ground  tax  and 
the  building  tax,  which  are  governed  by  different  laws  of 
incidence. 

The  value  of  a  house,  in  the  ordinary  usage  of  the  word, 
depends  upon  the  value  of  the  structure  plus  the  value  of 
the  lot.  The  value  of  the  structure  itself  is  fixed  by  the  law 
that  governs  the  value  of  commodities  the  supply  of  which 
can  be  increased  at  pleasure,  that  is,  in  the  long  run  it  is 
equal  to  the  cost  of  production,  or  rather  of  reproduction. 
The  rent  of  the  house  proper  is  normally  equal  to  the  inter- 
est on  the  capital  expended  plus  an  annual  sum  which,  when 
capitalized,  will  be  sufficient,  after  paying  all  necessary  ex- 
penses, to  replace  the  capital  by  the  time  the  house  is  worn 
out.  The  laws  which  govern  the  incidence  of  taxes  on 
houses  or  on  house  rents  are,  therefore,  analogous  to  those 
which  govern  the  incidence  of  taxes  on  capital  or  on  com- 
petitive profits.  On  the  other  hand,  the  value  of  the  lot  is 
fixed  in  agreement  with  the  general  principles  of  economic 
rent,  according  to  which  the  price  paid  is  measured  by  the 
superiority  of  situation.^  It  would  be  still  more  exact  to 
make  the  assertion  that  the  value  of  a  city  lot  is  determined 
by  the  general  law  of  price  which  governs  all  those  com- 

1  Pantaleoni,  Traslazione  del  Tributi,  pp.  208-213,  makes  a  long  argument 
against  confusing  economic  rent  with  the  rent  of  a  city  lot.  With  him  economic 
rent  means  agricultural  rent,  and  is  due  only  to  the  law  of  diminishing  returns; 
while  rent  arising  from  situation  is  not  economic  rent,  but  is  what  he  calls  surplus 
rent  {soprareddito).  But  this  surplus  rent  is  simply  another  name  for  profits. 
Rent  proper,  he  maintains,  arises  from  the  fact  that  the  price  of  agricultural  prod- 
ucts is  the  same  while  the  cost  of  production  differs.  Surplus  rent,  or  profits  on 
city  lots,  arises  from  the  fact  that  prices  differ,  while  the  cost  of  production  re- 
mains the  same.  The  English,  he  thinks,  have  improved  upon  the  Germans  and 
French  in  distinguishing  between  land  rent  and  ground  rent;  but  have  not  seen 
that  ground  rent  is  really  not  economic  rent  at  all. 

In  answer  to  Pantaleoni,  it  may  be  said  that  there  is  a  certain  justice  in  his  dis- 
tinction, but  precisely  in  the  opposite  way  from  that  in  which  he  understands  it. 
It  seems  arbitrary  to  confine  economic  rent  to  the  differential  product  of  the  law 
of  diminishing  returns.     Since  von  Thiinen  many  recent  writers  have  developed 


Taxes  on   Urban  Real  Estate  279 

modities  which  are  not  susceptible  of  an  indefinite  increase  in 
their  supply. 

In  using  the  term  "rent,"  however,  we  must  be  careful  not  to 
confuse  disparate  conceptions.  Even  in  the  case  of  the  site, 
what  is  sometimes  called  rent  is  not  the  pure  rent  or  the 
economic  rent  of  the  older  writers.  Just  as  the  net  returns 
of  agricultural  land  may  be  affected  by  the  investment  of 
capital  in  the  shape  of  improvements  in  the  land,  so  the  net 
income  from  a  city  lot  may  be  modified  by  the  sums  spent 
to  blast  away  the  rock,  to  fill  in  the  lot,  or  to  construct  a  road 
(when  done  at  private  expense).  ^  What  seems  to  be  pure 
land  rent  may  thus  be  in  part  either  interest  or  profits.  In 
urban  lots  this  is  indeed  apt  to  be  of  less  practical  importance 
than  we  have  found  it  to  be  in  the  case  of  agricultural  land.^ 
It  must,  however,  as  we  shall  see,  not  be  overlooked.*^ 

While  there  is  this  risk  of  confusion  in  the  case  of  land, 
the  danger  of  error  is  greatly  enhanced  in  the  case  of  a  house. 
The  rent  paid  for  a  house  is  by  no  means  tantamount  to  the 

this  idea.  On  the  other  hand,  whatever  truth  there  is  in  what  Sidgwick  calls  the 
static  theory  of  rent  applies  equally  to  the  causes  which  fix  the  rent  of  a  building 
lot.  In  other  words,  instead  of  applying  the  principle  of  economic  rent  to  city 
lots,  it  would  be  more  exact  to  say  that  the  same  causes  which  fix  the  differences 
in  the  value  of  city  lots  also  fix  those  of  agricultural  lands,  that  is  differences  in 
relative  situation  or  in  relative  fertility  combined  with  differences  in  situation  — 
or,  in  short,  differential  advantages  in  yielding  net  profits. 

^  So  Edgeworth,  referring  to  English  conditions,  says :  "  Even  the  landlord  of 
urban  sites  is  in  the  concrete  not  perfectly  inert.  The  '  master's  eye '  produces 
some  of  its  proverbial  effects.  If  he  has  not  supplied  sewers  and  roads,  at  least 
he  has  supervised  the  arrangement  of  streets  and  type  of  houses  so  as  to  render 
the  neighborhood  attractive."  —  Economic  Journal,  x  (1900),  p.  496. 

*  See  above,  pp.  264,  265. 

'  Marshall  (^Principles,  5  ed.,  1907,  pp.  433-4)  makes,  or  accepts,  the  distinction 
between  the  "public  value"  and  the  "private  value"  of  land,  meaning  by  the 
former  that  part  of  the  value  of  land  which  cannot  be  traced  to  the  work  and 
outlay  of  its  individual  holders,  hut  which  is  the  result  of  "  its  position,  its  exten- 
sion, its  yearly  income  of  sunlight  and  heat  and  rain  and  air, "  or  a  result  of  the 
action  of  the  community.  As  Mr.  Chorlton  points  out,  however,  the  "  public 
value"  of  a  city  lot  is  not  necessarily  its  "site  value."  See  J.  D.  Chorlton,  The 
Rating  of  Land  Values,  1906,  p.  67,  note  2.  This  seems  to  be  overlooked  by 
Professor  A.  C.  Pigou,  who  accepts  the  nomenclature  of  his  teacher  and  prede- 
cessor in  office  in  The  Policy  of  Land  Taxation,  1909,  chap.  ii. 


28o  Shifting  and  hicidence  of  Taxation 

"  economic  rent "  or  the  "  pure  rent "  of  the  economists.  The 
rental  of  a  house  is  the  gross  rent,  which  includes  not  only  inter- 
est on  the  sum  required  to  purchase  both  site  and  structure 
(or,  when  the  house  stands  on  leased  land,  interest  on  the  pur- 
chase price  of  the  house  plus  the  rental  paid  for  the  use  of 
the  land),  but  also  repairs,  necessary  expenses  of  management, 
and  taxes,  when  advanced  by  the  owner.  The  house  tax  as 
found  almost  everywhere  in  Europe  is  therefore  a  tax  on  the 
gross  rental  of  houses.  In  France  and  in  Austria  certain 
deductions  are  indeed  permitted  for  the  interest  on  borrowed 
capital,  while  in  Prussia  and  in  England  no  deductions  of 
any  kind  are  allowed,  although  in  the  latter  country,  where 
the  tax  is  assessed  on  the  occupier,  the  house  rent  is  of  course 
correspondingly  less.  When  the  house  tax  assumes  the  form 
of  a  tax  on  the  selling  value  of  the  property,  as  in  America, 
Switzerland  and  a  few  of  the  German  States,^  the  matter  is 
indeed  different,  for  the  selling  value  of  a  house  is  the  capital- 
ization of  the  prospective  net  income,  and  not  of  the  gross 
rental  of  the  property. 

We  may  therefore  consider  four  cases,  corresponding  to 
actual  facts : 

1.  The  tax  may  be  levied  on  the  site  owner  above,  without 
any  reference  to  a  house  tax  on  the  building  owner.  This 
would  correspond  to  Henry  George's  single  tax.  It  would 
be  in  effect  a  tax  on  ground  rents.  A  variation  of  this  is  the 
so-called  tax  on  unearned  increment  or  the  "increment  duty" 
as  found  in  Germany  and  suggested  in  England. 

2.  The  tax  may  be  levied  on  the  selling  value  of  the  house, 
irrespective  of  whether  there  is  a  corresponding  tax  on  the 
site.  This  might  be  the  case  where  structure  and  site  are 
separately  assessed. 

3.  The  tax  may  be  levied  on  the  selling  value  of  both 
structure  and  site.  This  is  the  case  with  the  real  estate  tax 
almost  everywhere  in  the  United  States. 

^  For  the  exact  conditions  in  the  various  European  states  see  Max  von  Heckel, 
Lehrhuch  der  Finanzrvissenscha/t,  I  (1907),  pp.  280-284.  For  Prussia  in  especial 
see  Richard  von  Kauffmann,  Die  Kommunalfinanzen,  II  (1906),  pp.  334-344. 


Taxes  on  Urban  Real  Estate  281 

4.  The  tax  may  be  assessed  on  the  gross  rent  of  the  house  — 
the  so-called  rental  —  and  may  be  imposed  either  on  the  house 
owner  —  as  is  true  of  the  greater  part  of  the  European  con- 
tinent—  or  on  the  occupier,  as  in  the  case  of  the  local  rates 
and  the  inhabited  house  duty  in  England. 

It  is  primarily  with  this  fourth  case  that  the  English  econ- 
omists have  busied  themselves.  On  the  other  hand,  most  of 
the  foreign  works  have  until  recently  paid  but  little  atten- 
tion to  any  of  the  problems  discussed  in  this  chapter.^ 

I.    A    Tax  on  the  Ground  Ozvjier 

The  case  of  a  tax  levied  only  on  the  ground  owner  is 
comparatively  simple.  The  owner  who  leases  his  land  will 
always  endeavor  to  get  as  much  as  possible  for  it.  The 
price  he  gets  will,  in  general,  be  entirely  unaffected  by  the 
imposition  of  a  tax.  For,  since  the  supply  cannot  be  in- 
creased, and  since  there  is  no  question  of  cost  of  production, 
the  change  in  price  will  be  effected  only  through  a  change  in 
the  demand.  Now,  if  the  demand  for  the  site  increases  to 
such  an  extent  that  the  ground  rent  not  only  covers  the  new 
tax  but  leaves  a  profit  in  addition,  the  tax  cannot  be  shifted  to 
the  lessee.     For  the  price  would  have  been  the  same  without 

^  We  now  have  several  important  contributions  to  the  discussion.  In  1899  the 
British  Royal  Commission  on  Local  Taxation  published  a  Blue  Book  entitled 
Memoranda  chiefly  relating  to  the  Classification  and  Incidence  of  Imperial  and 
Local  Taxes  [C-9528].  This  contains  a  general  paper  by  Sir  Edward  Hamilton 
and  a  series  of  answers  from  the  leading  British  economists  and  experts.  This 
will  be  referred  to  hereafter  as  Memoranda.  —  Partly  based  on  this  blue  book  are 
the  articles  of  Professor  Edgeworth  on  "The  Incidence  of  Urban  Rates"  in  the 
Economic  Journal,  vol.  x  (1900),  at  pp.  1 72,  340,  and  487.  In  1902  Professor  L. 
Einaudi  devoted  to  this  special  subject  of  urban  taxation  of  real  estate  an  entire 
volume  bearing  the  somewhat  misleading  title  Studi  sugli  Effetti  delle  Imposte, 
but  with  the  subtitle  Contrihuto  alio  Studio  dei  Probiemi  Tribiitari  Municipali. 
Torino,  288  pp.  The  recent  controversies  over  local  taxation  in  England  have 
also  elicited  a  number  of  discussions  of  the  general  problem  of  incidence,  of  which 
the  most  noteworthy  is  to  be  found  in  J.  Row-Fogo,  An  Essay  on  the  Reform  of 
Local  Taxation  in  England,  London,  1902,  esp.  chap,  iii,  pp.  106-182.  Less  valu- 
able although  clearly  written  is  The  Rating  of  Land  Values  by  J.  D.  Chorlton, 
Manchester,  1907,  chap.  7.  Cf.  also  Local  Taxation  in  London  by  M.  E.  Lange,  1906. 


282  Shifting  and  Incidence  of  Taxation 

the  tax,  since  the  demand  of  the  lessees  is  not  affected  by  a 
tax  on  the  lessor.  The  ground  owner  will  simply  get  less  net 
return  than  he  would  have  obtained  had  no  tax  been  im- 
posed —  that  is,  the  tax  will  fall  on  him.  In  the  same  way,  if 
the  demand  for  the  site  decreases,  the  price  will  diminish 
and  the  ground  owner  can  certainly  not  shift  the  tax.  Finally, 
if  the  demand  remains  the  same,  there  will  be  no  alteration  of 
the  price,  and  the  ground  owner  will  obtain  less  net  income 
than  before  because  of  the  tax.  Therefore  it  may  be  laid 
down  as  a  general  rule  that  a  tax  laid  on  the  owner  of  the  site, 
or  on  ground  rents,  cannot  be  shifted.^ 

On  the  other  hand,  it  must  be  remembered  that  owing  to 
the  principle  of  capitalization  the  new  purchaser  of  the  site 
buys  himself  free  of  tax,  i.e.,  includes  in  the  purchase  price 
the  capitalized  value  of  the  tax.  The  principle  of  capitaliza- 
tion is  applicable  to  urban  lands  to  a  far  greater  extent  than 
to  agricultural  lands,  for  the  reason,  mentioned  above,^  that 

1  J.  S.  Mill,  Political  Economy,  book  v,  chap,  iii,  §  6,  argues  that  this  is  true 
only  if  we  assume  an  equivalent  tax  on  agricultural  rent.  He  says  :  "  If  a  tax 
were  laid  on  ground  rents  without  being  also  laid  on  agricultural  rents,  it  would, 
unless  of  trifling  amount,  reduce  the  return  from  the  lowest  ground  rents  below 
the  ordinary  return  from  land,  and  would  check  further  building  .  .  .  until  in- 
creased demand  or  diminution  of  supply  .  .  .  had  raised  the  rent  by  a  full  equiva- 
lent for  the  tax.  But  whatever  raises  the  lowest  ground  rents  raises  all  others, 
since  each  exceeds  the  lowest  by  the  market  value  of  its  peculiar  advantages." 

This  argument,  however,  assumes  a  slow  and  continuous  gradation  from 
agricultural  rents  to  ground  rents.  As  a  matter  of  fact,  there  is  almost  always  a 
sudden  jump  from  the  one  to  the  other.  One  has  only  to  look  at  the  outskirts  of 
the  ordinary  American  town  to  be  convinced  of  the  fact  that  land  even  only 
prospectively  fit  for  building  sites  will  be  kept  idle  sooner  than  be  used  for  agri- 
cultural purposes.  The  whole  question,  moreover,  has  simply  a  theoretical  inter- 
est, since  agricultural  lands  are  almost  always  taxed  as  well  as  city  lots.  Sidgwick, 
The  Principles  of  Political  Economy,  book  iii,  chap,  viii,  §  8,  iv,  follows  Mill. 

Professor  Marshall,  who  also  follows  Mill,  considers  that  "  this  is  of  little  im- 
portance except  when  a  large  garden  attached  to  a  house  is  taxed  at  the  value  of 
urban  land,"  Memoranda,  p.  117.  Such  cases,  of  course,  are  becoming  in- 
creasingly rarer  in  European  cities,  and  are  almost  non-existent  in  America. 
Einaudi  concedes  that  such  a  progressively  slow  gradation  as  that  implied  in 
Mill's  argument  is  exceptional.  He  thinks  that  in  ordinary  cases  the  argument  in 
the  text  is  true  even  when  there  is  no  equivalent  tax  on  agricultural  rent.  Op. 
cit.,  pp.  98-99.  ^  Supra,  p.  270. 


Taxes  on    Urban  Real  Estate  283 

the  values  of  urban  lands  are  not  exposed  to  the  same  sharp 
changes  which  are  brought  about  in  the  value  of  agricultural 
lands  by  the  mutations  in  the  price  of  produce.  Where, 
therefore,  taxes  do  not  change  much,  the  burden  of  the  tax 
remains  relatively  stable  in  the  case  of  urban  lands,  and  thus 
makes  possible  a  capitalization  of  the  tax.  Hence  when 
urban  land  changes  hands  frequently,  the  tax  virtually  dis- 
appears and  becomes  a  charge  on  no  one.  In  the  meantime, 
however,  it  is  the  original  owner,  or  his  heir,  who  suffers. 

While  it  is  the  general  rule  that  a  tax  on  the  site  owner  can- 
not be  shifted,  there  are  some  qualifications  and  seeming  excep- 
tions which  deserve  mention. ^  Let  us  take  in  the  first  place 
the  case  of  a  tax  on  occupied  building  sites  with  the  absence 
of  a  tax  on  vacant  lots.  This  is  virtually  true  in  many 
American  cities  where  unoccupied  lots  are  in  practice  assessed 
at  much  lower  figures  than  improved  sites  ;  and  it  is  quite  true 
in  England  where  unoccupied  sites  are  not  assessed  at  all  to  local 
rates.  In  this  case,  provided  that  the  city  is  growing  and  the 
demand  for  house  accommodation  increasing,  every  site  that 
is  held  vacant  for  speculative  purposes  checks  the  building, 
and  hence  the  supply,  of  houses  in  that  particular  locahty. 
To  the  extent,  therefore,  that  the  speculative  site  owner  will 
be  induced  to  sell  or  to  lease  his  land  for  building  purposes  only 
on  payment  of  a  considerably  augmented  purchase  price  or 
rent,  the  effect  of  the  exemption  or  the  lower  assessment  of 
vacant  sites  will  be  to  keep  rents  higher  than  they  would 
otherwise  be.  A  special  tax  or  a  practically  higher  rate  on 
improved  sites  only  tends,  therefore,  to  be  shifted  to  the 
owner  of  the  building  on  the  improved  site  and  is  by  him  rolled 
off  on  the  occupier.  There  is,  hence,  much  to  be  said  in  de- 
fence of  that  portion  at  all  events  of  the  programme  of  the 
reformers  in  the  United  States  who  object  to  the  exemption 

*  Pantaleoni,  op.  cit.,  pp.  218-221,  thinks  that  where  a  heavy  site  tax  creates  a 
combination  between  the  landowners  in  a  given  section  of  the  city,  the  tax  will  be 
shifted  to  the  tenant.  But  as  Einaudi  shows,  op.  cit.,  pp.  93-95,  not  only  is  the 
tax  very  unlikely  to  create  such  a  combination,  but  even  if  it  did,  there  would  be 
no  shifting  to  the  tenant. 


284  Shift mg  and  Incidence  of  Taxation 

or  under-assessment  of  vacant  sites  as  responsible,  in  part  at 
least,  for  the  high  rents  paid  for  house  accommodation.^ 
Where,  as  in  England,  vacant  building  land  is  entirely  ex- 
empt^ from  local  taxation,  it  is  evident  that  one  of  the  reasons 
for  the  demand  for  the  rating  of  site  values  is  to  reach  the 
owner  of  the  vacant  lot,  and  thus  to  diminish  the  pressure  for 
house  accommodation  and  the  resulting  congestion  in  the 
slums.^  In  fact,  the  proposition  has  even  been  made  in  Eng- 
land and  indorsed  by  the  Royal  Commission  on  the  Housing 
of  the  Working  People  to  levy  a  special  tax  on  vacant  build- 
ing ground.* 

1  This  point  is  well  put  by  Lawson  Purdy,  The  Burdens  of  Local  Taxation  and 
Who  Bears  Them,  1901,  p.  27.  "  Where  there  is  speculation  in  land,  a  tax  upon 
land  affects  the  market  supply  of  land,  and  therefore  affects  the  price  of  land.  In 
the  absence  of  any  tax,  valuable  land  is  held  out  of  use  at  prices  higher  than  it  is 
worth  for  present  use.  When  the  supply  is  thus  restricted,  the  price  of  all  land 
for  rent  or  sale  is  increased,  a  tax  upon  land  in  proportion  to  its  value,  as  it  is 
high  or  low,  more  or  less,  forces  into  use  valuable  land  held  idle  in  expectation  of 
a  rise  in  value.  When  the  market  supply  of  land  is  thus  increased,  the  price  of 
land  is  decreased." 

^  In  England  unrented  houses  are  also  exempt.  But,  obviously,  unrented 
houses,  especially  in  growing  towns,  are  the  exception  ;  while  unoccupied  build- 
ing sites  are  common. 

^  Cf.  the  argument  in  The  Bating  of  Land  Values.  By  A.  W.  Fox,  1906,  p.  13. 
See  also  the  evidence  of  Fletcher  Moulton,  the  chief  statistician,  and  B.  F.  C. 
Costelloe,  the  chairman,  of  the  Local  Government  and  Taxation  Committee  of  the 
London  County  Council,  before  the  Royal  Commission  on  Local  Taxation  in  vols. 
ii  and  iv  of  the  Minutes  of  Evidence. —  Sargant,  one  of  the  chief  opponents  of  the 
scheme,  takes  in  his  work  on  Urban  Rating  the  mutually  inconsistent  positions 
that  the  rating  of  vacant  building  land  will  encourage  the  "jerry"  builder 
(p.  1 13),  and  will  "throw  it  more  into  the  hands  of  the  rich"  (p.  145).  His  ref- 
erences to  the  United  States  are  vitiated  by  his  ignorance  of  the  fact  that  vacant 
building  land  is  almost  universally  underassessed,  and  by  his  confusing  the 
taxation  of  capital  value  with  a  tax  on  personal  property. 

*  Professor  William  Smart,  in  discussing  this  proposal,  seems  to  lean,  although 
with  some  misgivings,  to  the  view  of  Sargant  as  outlined  in  the  last  note  : 
"  Whether  it  [the  special  tax  on  vacant  building  sites]  would  '  force  land  into  the 
market  for  building'  may  be  doubted.  It  would  of  course  tend  to  force  its  sale, 
but,  as  the  sale  would  be  at  a  reduced  price  owing  to  the  impending  tax,  it  might 
force  it  only  into  the  hands  of  other  and  wealthier  holders,"  —  Taxation  of  Land 
Values  and  the  Single  Tax,  1900,  p.  95.  The  other  objections,  that  it  would  pre- 
vent suburban  gardens  and  militate  against  any  well-considered  "  feuing"plan,  as 
in  Scotland,  are  of  more  weight. 


Taxes  on  Urban  Real  Estate  285 

A  second  point,  although  of  minor  importance,  may  be 
raised.  Suppose  that  the  tax  rate  is  uncertain  and,  as  in 
New  York  city  of  late,  increasing  rapidly  from  year  to  year. 
To  the  extent  that  the  increased  rate  may  be  deemed  perma- 
nent, the  tax  will  of  course  be  capitalized  and  will  reflect 
itself  in  a  diminished  value  of  the  land.  But  the  very 
uncertainty  of  the  outlook  may  tend  to  dissuade  intending 
house  builders  from  buying  the  sites  at  prevailing  prices  ; 
and  this  hesitancy  on  their  part  will,  where  population  is 
increasing,  obviously  mean  a  relatively  diminishing  supply  of 
house  accommodation.  The  uncertainty  of  the  tax  rate  on 
land  may  therefore  lead  to  a  slight  increase  in  house  rents, 
so  that  the  burden  will  be  borne,  to  this  extent  at  least,  by 
the  occupant  of  the  house  rather  than  by  the  owner  of  the 
site.^  Obviously,  however,  there  is  a  limit  to  the  possible 
increase  of  the  tax  rate,  a  limit  which  under  American  con- 
ditions is  ordinarily  fixed  by  constitutional  restrictions. 

Finally,  we  must  mention  the  case  where  an  entire  town  or 
part  of  a  town  is  practically  created  by  individual  or  cor- 
porate initiative.  Examples  of  this  are,  on  the  one  hand, 
such  towns  as  Gary  and  Pullman  in  America  or  Saltaire  in 
England,  and  on  the  other  hand  the  by  no  means  exceptional 
construction  of  a  factory  together  with  workingmen's  dwell- 
ings by  an  industrial  enterprise,  or  the  laying  out  of  a  new 
section  of  a  city  by  an  improvement  or  an  investment  com- 
pany. In  such  cases,  where  the  prairie  or  agricultural  land 
is  plotted,  sewered,  paved,  curbed,  and  generally  improved 
by  the  capitalist  investor,  virtually  the  whole  value  of  the  land, 
or  at  all  events  the  large  surplus  over  the  prairie  or  agricul- 
tural value,  may  be  regarded,  for  the  time  being  at  least,  as 
the  result  of  the  capital  invested ;  and  the  rent  as  equivalent 

^  This  contingency  is  also  contemplated  by  Edgeworth  in  the  Economic 
Journal,  x  (1900),  pp.  509-5 lO.  He  in  our  opinion,  however,  ascribes  too  much 
importance  to  the  point.  It  is  also  emphasized  by  Sargant,  who  puts  the  case 
too  broadly  when  he  states  that  it  "  would  prevent  secured  interests  in  houses 
from  being  arranged  so  as  to  yield  a  fixed  income,  and  so  would  drive  cheap  or 
trust  capital  out  of  house  property  and  raise  rents."  —  Memoranda,  p.  216.  Cf. 
also  Einaudi,  op.  cit.,  pp.  80-S3. 


286  Shifting  and  Incidence  of  Taxation 

to  the  interest  or  profits  on  the  capital.^  The  imposition  of  a 
tax  on  the  site  may  in  such  a  case  lead  to  its  being  shifted  to 
the  tenant,  as  otherwise  the  return  on  the  capital  might  be 
insufficient  to  tempt  the  intending  investor.^  Since  the  tax, 
however,  must  be  deemed  to  be  a  tax  on  the  capital  invested 
rather  than  on  the  land  itself,  the  incidence  of  the  tax  is  sub- 
ject to  the  qualifications  discussed  below  in  the  sections 
devoted  to  the  taxation  of  capital  in  general  or  of  houses  in 
particular.^ 

With  these  three  minor  exceptions,  then,  it  may  be  stated 
that  a  tax  on  the  site,  whether  it  be  levied  on  rental  value 
or  on  capital  value,  is  borne  by  the  owner  of  the  land. 

Instead  of  being  imposed  on  capital  or  rental  value,  how- 
ever, the  urban  land  tax  may  assume  the  form  of  a  so-called 
increment  tax,  assessed  on  the  difference  between  the  pres- 
ent selling  value  of  the  land  and  its  value  at  some  previous 
period. 

There  can,  of  course,  be  no  question  but  that  the  incidence 
of  such  an  increment  tax  is  on  the  landowner.*  But  where, 
as  has  sometimes  been  proposed,  the  tax  is  applied  to  vacant 
spaces  only,^  or  where  vacant  lots  are  taxed  at  a  higher  rate 
than  improved  lots,  the  ulterior  consequences  of  the  first 
imposition  of  the  tax  will  be  to  force  some  of  the  vacant  land 

1  Cf.  Marshall,  Principles  of  Economics,  5th  ed.,  1907,  pp.  444-445,  book  v, 
chap,  ii,  §  2. 

2  Cf.  Einaudi,  op.  cit.,  pp.  101-102.  *  Infra,  chap.  iv. 

■*  For  a  discussion  as  to  how  much  of  the  tax,  if  any,  is  shifted  back  to  the 
original  owner  through  capitalization,  see  C.  F.  Bickerdike,  "The  Principle  of 
Land  Value  Taxation  "  in  The  Economic  Journal,  xxii(i9i2),  1-15;  J.  C.  Stamp, 
"  Land  Valuation  and  Rate  Reform,"  ibid.,  xxi  (1911),  18,  and  "The  Incidence  of 
Increment  Duties,"  ibid.,  xxiii  (1913),  194.  Cf.  Y.  Scheftel,  The  Taxation  of 
Land  Valiu,  1916,  cap.  vii,  and  C.  C.  Plehn,  "  A  Study  of  the  Incidence  of  an  In- 
crement Value  Land  Tax"  in  Quarterly  Journal  of  Economics,  xxxii  (1918), 
487-506.  Among  German  contributions  on  the  subject,  perhaps  the  most  note- 
worthy are  H.  Kopp,  "  1st  die  Wertzuwachssteuer  uberwalzbar  ?  "  in  Finanzarchiv, 
xxxii  (1906),  pp.  1-12,  and  P.  Weyermann,  "Die  Ueberwalzungsfrage  bei  der 
Wertzuwachssteuer"  in  Annalen  des  deutschen  Reichs,  1910,  881-892. 

^  Cf.  above,  p.  284,  where  the  proposition  to  tax  vacant  sites  took  the  form 
both  of  a  tax  on  capital  value  and  of  an  increment  tax. 


Taxes  on   Urban  Real  Estate  287 

into  the  market,  and  thus  to  decrease  house  rents  throughout 
the  entire  building  area.  After  the  tax  has  been  in  opera- 
tion for  some  time,  and  when  all  land  is  improved  as  soon  as 
it  becomes  "ripe  for  building,"  the  new  equiUbrium  will  have 
been  reached,  and  a  special  increment  tax  on  vacant  sites  will 
exert  no  further  effect  on  the  house  occupant.^ 

2.    A    Tax  on    Value  of  the  House 

Let  us  next  take  up  the  case  where  the  tax  is  assessed  on 
the  value  of  the  house  and  imposed  on  the  house  owner,  irre- 
spective of  the  question  whether  he  is  the  landowner.  In 
other  words,  let  us  deal  with  the  tax  on  the  structure,  or,  if 
the  tax  is  not  levied  according  to  capital  value,  with  a  tax  on 
net  building  rent  as  opposed  to  that  on  ground  rent. 

The  generally  accepted  doctrine — that  of  Adam  Smith, 
Ricardo  and  Mill  —  may  be  expressed  as  follows:  Buildings 
represent  the  investment  of  so  much  capital  and  labor. 
They  require  an  outlay  for  construction,  for  maintenance, 
for  repairs,  for  insurance.  No  one  will  enter  on  the  business 
of  having  houses  built  for  investment  unless  he  can  count  on 
a  definite  return,  which  must  in  general  be  equal  to  the 
returns  from  capital  invested  in  undertakings  of  approxi- 
mately the  same  nature.  A  tax  imposed  on  the  owners  of 
the  building  will  therefore  generally  be  shifted  to  the  occu- 
piers ;  for,  if  the  tax  could  not  be  shifted,  it  would  reduce 
the  profits  of  the  owners  below  the  customary  level  in  similar 
investments.  The  result  would  be  a  cessation  of  building 
operations,  a  consequent  scarcity  of  houses  and  a  gradual 
increase  in  the  rent  or  value  of  existing  houses,  until  the 
margin  became  high  enough  to  tempt  the  investor  into 
further  operations.  The  working  of  this  law  of  the  trans- 
ferabiUty  of  capital  is,  of  course,  slower  here  than  in  the  case 

*  This  is  overlooked  by  Einaudi,  op.  cit.,  p.  113,  who,  moreover,  unduly  com- 
plicates what  is  at  bottom  a  very  simple  phenomenon,  and  who  introduces  into 
his  discussion  all  sorts  of  hypothetical  cases  which  never  happen.  Cf.  e.g.  his 
treatment  of  an  increment  tax  on  occupied  sites  to  be  levied  only  when  the  old 
buildings  are  demolished  or  repaired.     Op.  cit.,  pp.  118-119.    See  below,  p.  317. 


288  Shifting  and  Incidence  of  Taxation 

of  quickly  consumable  commodities ;  for  since  houses  are 
more  or  less  permanent,  we  cannot  assume  an  immediate 
diminution  of  supply.  Given  a  stationary  supply  of  houses, 
their  value  or  their  rent  will  rise  only  with  the  slow  increase 
of  population,  that  is,  with  a  relative  diminution  of  the  sup- 
ply. But  in  the  long  run  the  working  of  the  law  is  inevita- 
ble. Such  a  tax  will,  therefore,  be  shifted  to  the  consumer, 
that  is,  to  the  tenant. 

This  doctrine,  which  may  be  called  the  orthodox  opinion, 
requires  qualification  in  some  particulars.  The  two  chief 
reasons  why  the  theory  of  the  inevitable  shifting  of  the  house 
tax  to  the  tenant  is  not  always  true  are  as  follows  :  (i)  a  dis- 
tinction should  be  drawn  between  new  and  old  houses ;  and 
(2)  another  should  be  drawn  between  general  and  exclusive 
taxes. 

In  the  first  place,  a  distinction  should  be  drawn  between 
houses  already  constructed  before  the  tax  is  imposed  or 
increased  and  those  built  after  the  imposition  or  increase  of 
the  tax.  It  may  be  argued  that,  since  a  tax  on  new  houses 
is  always  shifted  to  the  occupier  —  for  otherwise  they  would 
not  be  built  —  the  same  reason  applies  to  old  houses;  for 
a  scarcity  of  houses  will  affect  the  values  and  rents  of  all 
houses,  whether  new  or  old. 

This  argument,  however,  is  not  convincing.  Suppose  that 
a  town,  or  a  portion  of  a  town,  is  for  some  reason  decaying. 
In  such  a  case,  the  values  and  the  rents  of  existing  houses 
will  of  course  fall.  The  owners  of  existing  houses  cannot, 
at  first,  escape  bearing  the  burden  of  the  tax.  They  cannot 
shift  the  tax  to  the  ground  owners,  for  since  the  structures 
are  already  on  the  land,  presumably  under  long  leases, 
the  ground  owners  cannot  be  compelled  by  competition  to 
reduce  their  ground  rents.  Until  the  expiration  of  the  lease 
the  house  owner  certainly  cannot  shift  the  tax  to  the  ground 
owner.  On  the  other  hand,  the  house  owner  will  not  be  able 
to  shift  the  tax  on  the  occupier,  because  no  actual  diminution 
in  the  supply  of  houses  is  possible,  and  because,  by  the  sup- 
position, there  is  no  increase  in  the  demand,  but  rather  the 


Taxes  on  Urban  Real  Estate  289 

reverse.  Not  until  a  condition  of  stable  equilibrium  has  been 
reached  will  the  building  owner  cease  to  bear  the  burden. 
That  is  to  say,  it  will  not  be  a  question  of  equality  of  profits, 
but  simply  one  of  the  existing  relations  of  demand  and  supply. 
Hence,  if  population  is  stationary  or  declining,  a  tax  on  exist- 
ing houses  (and  there  will,  of  course,  be  no  new  houses, 
because  there  will  be  no  demand  for  them)  will  inevitably 
fall  on  the  house  owner.  Furthermore,  if  he  sells  the  house 
he  will  lose  the  capitalized  value  of  the  decrease  of  rent ;  so 
that,  under  the  theory  of  capitalization,  only  the  original 
owner  will  bear  the  tax  until  there  is  a  still  further  decline  in 
population,  when  the  process  will  repeat  itself.^ 

Although  the  condition  just  described  may  be  considered 
in  some  sense  exceptional,  it  actually  occurs  in  all  communi- 
ties at  periodically  recurring  intervals.  And  although  the 
reasoning  would  not  be  applicable  to  the  general  conditions 
of  progressive  society  where  new  houses  are  being  continually 
built,  the  distinction  is  of  sufficient  importance  to  invahdate 
the  hard  and  fast  rule  of  the  older  economists. 

Another  objection,  which  is,  however,  less  tenable,  has 
recently  been  raised  against  the  older  doctrine.  Pantaleoni 
in  Italy  and  Sidney  Webb  in  England  maintain  that  a  tax  on 
the  building  owner  tends  to  be  shifted,  not  on  the  tenant,  but 
on  the  ground  owner.  Pantaleoni  claims  that  this  must 
necessarily  happen  because,  if  the  tax  were  to  fall  on  the 
house  owners,  they  would  build  no  more  houses,  and 
would  thus  effect   a   decrease    in    the  demand   for  building 

^This  is  of  course  true  only  on  the  assumption  which  governs  this  whole  section 
that  the  tax  is  an  exclusive  tax,  or  that  the  rate  of  the  tax  is  higher  than  on  other 
property.  Einaudi,  who  agrees  that  the  doctrine  ♦'is  exact  only  within  these 
limits,"  forgets  (o/.  cil.,  p.  136)  that  these  are  precisely  the  limits  set  by  me. 
Einaudi  also  seeks  to  draw  a  distinction  between  decaying  and  stationary  cities. 
With  his  fondness  for  hypothetical  examples  he  takes  the  case  of  a  city  in  which 
the  population  changes  neither  in  number  nor  in  wealth,  and  discusses  at  length 
what  will  be  the  result  of  ataxia  the  case  of  new  houses  only  (o/.  «V.,  pp.  136-137). 
But  he  forgets  that  with  a  stationary  population  there  will  be  no  new  houses^ 
except,  indeed,  in  the  very  rare  cases  when  a  house  has  completely  decayed  or  is 
destroyed  by  Hre.  And  there  does  not  seem  to  be  much  use  in  discussing  the 
incidence  of  a  tax  levied  exclusively  on  such  houses. 


290  Shifting  and  Incidence  of  Taxation 

lots,  which  would  result  in  a  depreciation  of  the  value  of 
the  land.^ 

This  argument  seems  to  rest  on  a  misconception.  It  is, 
indeed,  true  that  the  building  owners  will  not  bear  the  tax. 
But  what  reason  is  there  for  assuming  that  the  mere  cessa- 
tion of  building  operations,  which  would  ensue  on  the  impo- 
sition of  the  tax,  will  cause  a  depreciation  in  the  value  of  the 
lot  ?  The  non-construction  of  new  houses  cannot,  of  itself, 
cause  the  ground  rents  of  existing  houses  to  fall ;  it  can  only 
prevent  a  further  increase  in  the  value  of  the  land,  or  per- 
haps, at  most,  bring  about  a  fall  in  the  value  of  vacant  lots. 
Until  the  old  leases  run  out,  the  ground  rents  of  occupied  lots 
are  not  apt  to  fall,  even  if  population,  and  therefore  demand, 
diminishes.  Much  less  will  they  fall  if  simply  a  tax  is  imposed. 
Even  after  the  old  leases  run  out,  the  ground  rents  will  not 
fall  unless  the  taxes  on  the  houses  are  so  extraordinarily  high 
that  the  building  owners,  who  have  the  privilege  of  renewal, 
will  prefer  to  abandon  their  houses  entirely  rather  than  to 
renew  their  leases.  Only  in  this  most  exceptional  case^  can 
the  building  tax  be  shifted  in  part  on  the  ground  owner.  If, 
indeed,  the  law  of  real  estate  were  changed  so  that  fixtures  to 
the  land  would  not  go  with  the  land,  and  if  houses  could 
easily  be  removed  from  plot  to  plot,  then,  but  only  then,  would 
it  be  true  that  a  building  tax  could  always  be  transferred  to 
the  ground  owner  in  the  shape  of  decreased  ground  rent.^ 

Mr.  Webb's  argument  is  equally  inconclusive.  He  main- 
tains that  the  ground  landlord  does  not  occupy  a  fixed  position. 
Land  in  the  neighborhood  of  a  city  has  only  an  agricultural 
value  until  it  becomes  ready  for  splitting  up  into  building 
plots.  But  the  value  of  such  land,  says  Mr.  Webb,  does  not 
pass  imperceptibly  from  agricultural  value  to  building  value. 

^  Pantaleoni,  op.  cii.,  pp.  221-223. 

^  This  exceptional  case  is  virtually  the  one  mentioned  by  Professor  Edgeworth 
in  his  example  7  in  the  Economic  Journal,  vii,  p.  65.  He  expresses  it  a  little 
differently,  making  the  exception  consist  in  the  fact  that  the  tax  is  equal  to  the 
original  ground  rent  plus  the  constant  building  rent. 

^  For  a  criticism  of  a  similar  argument  of  Pierson,  see  below,  p.  300. 


Taxes  on   Urban  Real  Estate  291 

By  custom  there  is  almost  always  a  great  jump.  The  land- 
owner, who  can  in  any  case  get  a  price  much  larger  than  the 
agricultural  value,  Mr.  Webb  continues,  has  a  fixed  point  of 
resistance.  He  will  be  willing  to  take  a  little  less  than  before 
the  imposition  of  the  tax,  since  it  is  merely  a  question  of  compe- 
tition between  the  builder  and  the  owner  of  land  available  for 
building.  Hence  the  incidence  of  a  tax  on  houses  will  be  the 
same  as  that  of  a  tax  on  land  —  namely,  on  the  landowner.^ 

This  argument  seems  to  be  fallacious  because  it  ignores 
the  fact  that  the  ground  owner  is  in  the  stronger  position. 
As  between  the  landowner  and  the  tenant,  the  tenant  is  the 
weaker  party.^  The  house  builder  knows  in  normal  cases  of 
increasing  demand  that  he  can  more  easily  raise  rents  (since 
demand  increases)  than  compel  the  ground  owner  to  take 
less  than  the  market  value.  The  landowner  is  not  compelled 
to  part  with  his  land;  but  the  tenant  is  compelled  to  occupy 
some  apartments.^ 

It  would,  therefore,  in  the  main  be  true  that,  given  the 
normal  conditions  of  progressive  society  and  the  continued 
existence  of  prosperity  —  and  apart  from  the  qualification 
to  be  noticed  below — the  tax  on  the  building  owner  is 
shifted.  And  since,  as  we  have  just  seen,  the  tax  cannot  be 
shifted  to  the  ground  owner  (except  in  the  rare  case  men- 
tioned),* it  will  tend  to  be  shifted  to  the  other  party  in  interest 

^  Webb,  in  Report  from  the  Select  Committee  on  Town  Holdings,  etc.,  1890, 
qu.  42-44,  pp.  5,  6. 

■^  Bastable,  Public  Finance,  book  iv,  chap,  ii,  §  5,  as  well  as  Edgeworth, 
Economic  Journal,  vii,  pp.  66-68,  seems  to  overlook  this  in  expressing  the  opinion 
that  the  tendency  is  for  the  tax  to  be  shifted  to  the  ground  owner.  Graziani, 
Istituzioni,  p.  362,  agrees  with  the  argument  in  the  text  as  over  against  Panta- 
leoni  and  Webb. 

8  For  a  fuller  proof  of  the  validity  of  this  statement,  see  below,  p.  313. 

*  Professor  Bastable  advances  another  case  :  "  It  may  happen  that  the  prem- 
ises, owing  to  the  situation,  command  a  monopoly  value,  in  which  case  the  owner, 
having  obtained  the  highest  possible  rent,  must  submit  to  pay  the  public  charges; 
the  mere  building  owner  will  recoup  himself  at  the  ground  landlord's  expense."  — 
Public  Finance,  book  iv,  chap,  ii,  §  5.  But  why  should  the  landowner  take  less? 
The  building  owner  is  in  the  weaker  position,  for  his  building  is  on  the  land,  and 
under  the  law  goes  with  the  land.  Moreover,  as  is  pointed  out  below,  p.  307, 
there  is  no  such  thing  as  a  strict  monopoly  value  of  a  lot. 


292  Shifting  and  Incidence  of  Taxation 

—  the  occupier.  In  other  words,  given  an  increased  demand 
for  house  accommodations,  the  rents  of  existing  houses  will 
rise  until  the  supply  of  new  structures  is  equal  to  the  demand. 

It  may  be  said  that  in  the  mean  time  the  house  owners 
have  a  practical  monopoly.  Theoretically,  indeed,  the  house 
owner  himself  would  during  the  interval  bear  the  tax  if  the 
rise  of  rents  were  due  solely  to  increase  of  population,  be- 
cause in  the  face  of  this  increased  demand  he  could  have 
obtained  the  same  rent,  had  the  tax  not  been  imposed.  In 
other  words,  as  in  the  case  of  all  monopolies  where  the  price 
depends  largely  on  the  purchasing  power  of  the  consumer, 
the  tax  would  simply  mean  a  diminution  of  the  otherwise 
greatly  enhanced  profits  to  the  house  owner.^  Practically, 
however,  there  is  never  such  an  interval  in  progressive  com- 
munities. Houses  are  built  continually,  and  if  there  is  tem- 
porarily any  deficiency  in  the  supply,  it  is  owing  to  the 
decreased  profits  of  the  house  owners.  In  order  that  these 
profits  may  be  maintained,  the  tax  on  new  houses  must  fall 
where  alone  there  is  a  margin  for  it — that  is,  on  the  rent  paid 
by  the  occupier.  But  since  the  rents  in  the  new  houses  fix 
the  standard  of  rents  in  the  old  houses  (allowance  being 
made  for  the  superiority  of  situation,  which,  however,  has 
nothing  to  do  with  the  building  rent,  but  only  with  the 
ground  rent),  the  owners  of  both  old  and  new  houses  are  able, 
in  the  normal  cases  here  cited  and  in  the  long  run,  to  shift 
the  burden  to  the  tenants.  It  must,  however,  be  remembered 
that  this  is  true  only  in  the  normal  cases  and  in  the  long  run. 

The  second  qualification  of  the  doctrine  that  the  building 
tax  will  be  shifted  to  the  occupier  rests  on  the  distinction 
between  a  general  and  an  exclusive  tax.  The  whole  argument 
up  to  this  point  has  been  conducted  on  the  assumption  that 
the  house  tax  is  a  special  or  exclusive  tax.  As  soon  as  other 
forms  of  capital  or  other  profits  of  investments  also  are 
taxed,  the  entire  basis  of  this  argument  falls  away.     This 

^  This  is  the  case  mentioned  by  Ricardo,  Principles,  chap,  xiv,  par.  2;  by  John 
Stuart  Mill,  Political  Economy,  book  v,  chap,  iii,  §  6,  par.  3;  and  by  Professor 
Edgeworth,  Economic  Journal,  vii,  pp.  50-52. 


Taxes  on  Urban  Real  Estate  293 

has  been  frequently  overlooked  by  those  who  have  attempted 
to  draw  practical  conclusions  from  the  theories  of  the  clas- 
sical economists.  The  doctrine  of  the  shifting  of  a  house  tax 
to  the  occupier  depends  on  the  assumption  that  would-be 
house  builders  will  otherwise  prefer  to  put  their  money  in 
non-taxable  investments,  thus  bringing  about  a  scarcity  of 
houses  and  an  increase  of  rents.  But  if  other  capital  or 
profits  are  also  taxed,  there  will  be  no  reason  for  refusing  to 
invest  in  houses.  Hence  rents  and  values  will  not  rise,  and 
the  tax  cannot  be  shifted.  In  other  words,  when  a  house 
tax  is  part  of  a  system  of  taxation  which  reaches  all  other 
kinds  of  property  or  income,  and  taxes  them  at  the  same 
rate,  the  incidence  of  the  tax  will  always  be  on  the  original 
taxpayer — that  is,  the  house  owner.  His  profits,  like  those 
of  all  other  capitahsts,  will  be  reduced  by  the  tax.  So,  again, 
if  house  property  or  house  rents  are  taxed  at  a  higher  rate  than 
the  property  or  profits  of  other  classes,  only  the  surplus  above 
the  average  rate  of  the  tax  will  be  shifted  to  the  occupier, 
and  that  only  in  the  normal  cases  already  mentioned.^ 

Our  conclusions  maybe  summarized  as  follows  :  If  a  tax  is 
imposed  on  the  building  owner,  it  will  remain  on  him  when 
population  decreases  or  is  stationary,  or  when  the  locality 
decays.  It  will  be  shifted  to  the  ground  owner  only  when 
the  diminution  or  decay  is  so  great  and  the  taxes  so  high  that 
the  building  owner  will  voluntarily  relinquish  the  house  rather 
than  renew  the  lease.  It  will  be  shifted  to  the  occupier  under 
normal  conditions  of  advance  in  economic  welfare  so  far  as 
the  tax  is  exclusive.  Otherwise  only  so  much  will  be  trans- 
ferred to  the  occupier  as  exceeds  the  usual  rate  for  other 
property  or  profits,  while  the  remainder  will  fall  upon  the 
house  owner.  The  exact  proportions  depend  upon  the  gen- 
eral system  of  taxation  in  each  country  or  epoch,  and  upon 
the  particular  conditions  of  the  individual  case. 

'  The  theory  of  capitalization  of  incidence  is  not  applicable  here,  although, 
remarkable  to  say,  it  has  been  attempted  by  Myrbach,  "  Uie  Hesteuerung  der 
Gebaude  und  VVohnungen  in  Oesterreich,"  I'ubinger  Zeitschrift  fur  die  gesammte 
Staats-vissenschafl,  vol.  41,  esp.  p.  409. 


294  Shifting  and  Incidence  of  Taxation 

3.    A    Tax  on  the  Owner  of  House  and  Ground 

We  next  come  to  the  third  case,  where  the  tax  is  levied  on 
the  ground  owner  who  is  at  the  same  time  the  house  owner, 
and  is  assessed  on  the  selling  value  of  both  site  and  structure. 
This  is  the  common  American  system  of  the  real  estate  tax. 
The  problem  is  in  this  case  comparatively  simple,  as  we  need 
only  to  combine  the  conclusions  arrived  at  in  the  two  preceding 
cases. 

So  far  as  the  real  property  tax  may  be  resolved  into  the  site 
tax  and  the  building  tax,  the  tax  on  the  land  when  assessed 
on  the  landowner  will  tend  to  remain,  as  we  have  seen,  where 
it  is  first  put.  The  incidence  of  the  ground  tax,  in  other 
words,  is  on  the  landlord.  He  has  no  means  of  shifting  it; 
for,  if  the  tax  were  to  be  suddenly  abolished,  he  would  never- 
theless be  able  to  extort  the  same  rent,  since  the  ground  rent 
depends  primarily  on  the  demand  of  the  occupiers.  The  tax 
simply  diminishes  his  profits.  It  must  not  be  forgotten,  how- 
ever, that,  as  has  been  pointed  out  above,^  there  are  minor 
qualifications  of  the  general  doctrine  of  the  non-shiftability  of 
the  tax  on  the  site.^ 

The  incidence  of  the  house  tax,  on  the  other  hand,  is  fixed 
by  the  rules  laid  down  above.  The  question,  therefore,  as  to 
how  far  the  real  estate  tax  is  shifted  to  the  occupier  in  Amer- 
ican cities  depends  partly  on  the  actual  existence  or  non- 
existence of   a  general  property  tax,  partly  on  the  relative 

1  Supra,  pp.  283-285. 

2  Mr.  Edgar  J.  Levey  questions,  in  the  Political  Science  Quarterly,  vol.  xxiv 
(1909),  pp.  45-51,  the  statement  that  the  site  tax  cannot  in  general  be  shifted  to 
the  tenant.  As  is  pointed  out,  however,  by  Mr.  Louis  F.  Post  in  The  Public 
(Chicago),  vol.  xii  (1909),  pp.  365-370,  the  argument  of  Mr.  Levey  involves  a 
misconception.  With  reference  to  the  elements  of  friction  which  enter  into  the 
problem,  Mr.  Levey  calls  attention  {op  cit.,  p.  48)  to  immobility  of  invested  capital, 
long  leases  at  fixed  rentals,  varying  conditions  in  the  building  trades,  and  cen- 
trifugal and  centripetal  forces  of  racial  and  family  ties  in  old  and  newly  formed 
tenement  districts.  Some  of  these  points  are  alluded  to  below  in  the  discussion 
of  a  tax  levied  on  the  gross  rent  of  houses.  The  general  conclusions  of  Mr.  Levey 
as  to  the  ultimate  incidence  of  an  urban  tax  on  real  estate  in  general  are  in 
substantial  agreement  with  those  expressed  in  the  text. 


Taxes  on   Urban  Real  Estate  295 

value  of  the  house  and  the  lot,  and  partly  on  the  peculiar 
circumstances  of  the  particular  piece  of  property. 

If  our  general  property  tax  were  actually  enforced,  the  real 
estate  tax  would  beyond  all  doubt  be  borne  entirely  by  the 
owner.  But  in  American  cities  the  general  property  tax  has 
become  virtually  a  real  property  tax.  In  other  words,  city 
real  estate  bears  the  greater  part  of  the  weight  of  municipal 
taxation.  In  proportion  as  city  houses  are  taxed  at  a  higher 
rate  than  other  capital,  the  main  condition  under  which  the 
tax  may  be  shifted  to  the  occupier  is  present.  If  we  take  the 
small  American  towns  where  the  investments  are  mainly 
local  and  where  personal  property  is  reached  to  a  fairly  high 
degree,  it  is  very  probable  that  the  real  estate  tax  is  not 
shifted  to  the  occupier.  But  the  larger  the  city,  and  the 
greater  the  chances  of  investment  outside,  the  less  will  be 
the  proportion  of  personalty  taxed,  and  the  greater  will  be 
the  possibility  of  the  shifting  of  a  part  of  the  real  estate 
tax  to  the  tenant. 

The  possibility  that  the  tax  may  be  shifted  turns  into  a 
probability  when  we  remember  that  the  building  tax  tends  to 
form  the  greater  part  of  the  total  tax.  The  average  dwelling- 
house  in  New  York  city,  for  example,  is  worth,  when  first 
built,  from  two  to  three  times  as  much  as  the  lot.  In  the 
tenement  house  districts  the  proportion  is  slightly,  if  at  all, 
less,  except  in  the  case  of  the  tumble-down  wooden  houses, 
which  are  fast  disappearing.  It  is  true,  of  course,  that  with 
the  passage  of  time  the  value  of  the  house  tends  to  decline, 
while  that  of  the  lot  tends  to  increase.  From  this  it  might 
be  inferred  that  the  real  estate  tax  falls  mainly  on  the  owners. 
But  this  tendency  is  materially  counteracted  by  the  fact  that, 
as  sites  become  more  valuable,  owners  are  apt  to  tear  down 
the  old  structures  and  to  erect  more  expensive,  and  therefore 
more  lucrative,  buildings.  Even  in  the  crowded  business 
centres  it  is  now  becoming  the  custom  to  erect  vast  buildings 
whose  value  in  some  cases  considerably  exceeds  that  of  the 
ground  on  which  they  stand. 

Finally,  remembering  the  qualifications  laid  down  above,  it 


296  SJiifting  and  Incidence  of  Taxation 

may  be  said  that,  while  the  real  estate  tax  falls  on  the  owner 
in  case  of  a  stationary  or  a  declining  population,  a  consider- 
able portion  of  the  tax  is  shifted  to  the  tenant,  in  normally 
prosperous  town  or  city  districts,  under  the  present  adminis- 
tration of  our  property  tax.  When  we  reflect  that  in  the 
city  of  New  York  over  three-quarters  of  the  population  live 
in  tenement  houses,  we  are  thus  forced  to  the  conclusion  that 
in  the  great  cities  a  great  share  of  American  local  taxation  is 
to-day  borne  by  those  least  able  to  pay.  The  greater  the 
extent,  however,  to  which  the  existing  real  property  tax  is 
being  generalized  or  supplemented  by  other  taxes  designed 
to  reach  the  real  ability  of  the  taxpayer,  the  less  probable 
will  be  the  original  shifting  of  the  tax  to  the  occupier.  The 
reforms  in  the  general  conditions  of  American  local  and 
state  taxation  will  thus  indirectly  affect  many  classes  who  at 
present  think  that  they  have  nothing  either  to  gain  or  to  lose 
by  the  process. 

The  question  finally  arises  as  to  the  ulterior  effects  of  a  tax 
which  is  shifted  to  the  occupier.  To  answer  this  question, 
which  is  a  part  of  the  larger  problem  of  the  taxation  of 
property,  profits  and  wages,  to  be  discussed  in  subsequent 
sections,  it  is  necessary  not  only  to  distinguish  between  dwell- 
ings as  opposed  to  shops,  offices  or  factories,  but  also  in  the 
former  case  to  differentiate  between  the  working  class  popu- 
lation on  the  one  hand  and  the  middle  and  higher  class 
population  on  the  other. 

When  the  tenant  is  the  occupant  of  a  shop  or  business 
office,  the  tax  must  be  regarded  as  one  on  production  rather 
than  on  consumption.  For  the  amount  of  rent  paid  is  a 
charge  on  the  business  or  occupation  of  the  same  nature  as 
insurance  and  other  expenses.  The  tax  will  therefore  be  apt 
to  be  shifted  to  the  purchasers  of  the  commodities  produced 
or  services  rendered,  for  the  marginal  producer  can  obviously 
not  afford  to  remain  in  that  business  unless  his  outlays  are  at 
least  covered.  In  the  case,  however,  of  a  new,  or  suddenly 
increased,  tax  the  shifting  of  the  burden  to  the  consumer  may 
be  affected  by  the  character  of  the  business  and  the  nature  of 


Taxes  on   Urban  Real  Estate  297 

the  demand.  Thus,  here  again,  there  is  no  justification  for 
the  optimistic  theory  of  diffusion. 

Where  the  demand  for  the  commodity  is  somewhat  less 
elastic,  the  occupant  of  the  factory  or  store  may  endeavor  to 
reduce  expenses  by  diminishing  the  size  of  his  premises,  rather 
than  to  add  the  entire  tax  to  the  price.  Moreover,  an  impor- 
tant consideration  which  may  prevent  the  shifting  of  a  tax 
to  the  consumer  is  whether  the  article  produced  is  essentially 
local  in  character  or  is  sold  in  competition  with  similar  articles 
produced  elsewhere.  In  the  latter  case  that  part  of  the  tax 
which  is  common  to  all  the  producing  centres  would  be  shifted 
to  the  public.  And  even  as  to  this  portion  of  the  tax,  the 
qualifications  mentioned  above  in  connection  with  a  tax  on 
agricultural  produce  ^  will  be  applicable  in  the  case  of  com- 
modities which  are  subject  to  periodical  and  sharp  oscillations 
of  price.  In  general,  however,  it  may  be  expected  that  a  tax 
on  business  rents  will  be  of  the  nature  of  a  tax  on  gross  out- 
put, and  subject  to  the  law  of  incidence  discussed  below,^  in 
conformity  with  which  the  tax  is  ordinarily  shifted  to  the 
consumer. 

At  the  other  end  of  the  scale  from  tenants  of  shops  or 
business  premises  are  the  occupants  of  better-class  dwellings. 
Here  the  real  estate  tax  must  be  regarded  as  in  the  nature  of 
a  tax  on  income,  or  at  least  of  a  tax  on  expenditure  viewed  as 
a  rough  criterion  of  ability  to  pay.  The  amount  expended  on 
house  rent  by  an  occupier  of  this  class  has  only  a  most  indirect 
connection  with  his  business  activity.  If  he  is  prosperous  he 
will  spend  more  on  house  rent ;  but  his  prosperity  is  after  all 
a  result,  and  not  a  condition,  of  his  business  activity,  and  is 
not  reflected  in  the  prices  charged  for  the  commodities  which 
he  produces.  In  such  cases  the  tenant  is  the  ultimate  con- 
sumer. 

Between  these  two  extremes  lies  the  mass  of  the  working 
population.  In  one  sense  the  rental  paid  by  a  workman 
may  be  likened  to  that  of  other  occupiers  of  dwellings,  and 

1  Supra,  pp.  264  tt  seq.  ^  ^t/ra,  chap,  v,  §  i. 


298  Shifting  and  Incidence  of  Taxation 

a  tax  on  rentals  would  then  be  a  rough  index  of  income.  On 
the  other  hand,  however,  it  is  perhaps  more  legitimate  to  re- 
gard the  house  rent  of  a  laborer  as  one  of  the  necessary 
elements  in  expenditure  which  go  to  maintain  his  efficiency, 
and  which  should  hence  more  properly  be  considered  as  an 
item  on  the  side  of  production,  rather  than  of  consumption. 
Viewed  in  this  light,  a  tax  on  house  rent  would  be  equivalent 
to  a  tax  on  wages  or  on  the  necessaries  of  life.  In  its  broadest 
aspects  such  a  tax,  as  we  shall  see  later,^  may  be  considered 
as  susceptible  of  being  shifted  onward,  and  generally  diffused. 
It  is  well  established,  for  instance,  that  wages  are  higher  in 
New  York  city  than  in  a  small  community,  largely  because  of 
the  higher  standard  of  life,  or  the  increased  scale  of  expendi- 
ture in  the  larger  city,  the  most  important  part  of  the  dif- 
ference being  due  to  the  factor  of  house  rents.  Here  again, 
however,  we  must  be  mindful  of  the  warning  given  below  ^ 
and  reflect  that  where  wages  are  not  at  the  minimum  of  ex- 
istence, a  tax  on  the  necessaries  of  life  may  be  only  partially 
compensated  by  a  rise  in  wages,  and  that  the  resulting  burden 
on  the  wage  earner  is  frequently  appreciable. 

4.    A    Tax  on   the    Gross   Rent   of  Houses 

We  come  finally  to  the  tax  on  the  gross  rent  of  houses,  or 
on  what  is  ordinarily  called  house  rentals.  The  rental  paid 
for  a  house  is  not  the  net  rent,  any  more  than  the  rental 
paid  for  a  telephone  represents  the  net  return  of  the  in- 
vestment. The  rental  of  a  house  is  the  gross  rent,  from 
which  there  must  be  deducted  expenses  of  maintenance, 
repairs,  insurance  and  the  like,  in  order  to  ascertain 
the  net  rent.  Since  the  selling  value  of  the  house  is  a  capi- 
talization of  the  net  rent,  and  not  of  the  gross  rent,  there  is  a 
difference  between  a  tax  on  capital  value  and  a  tax  on  the 
so-called  rental  of  a  house. 

As  was  stated  above,^  th^  house  tax,  as  it  is  found  almost 
everywhere  in  Europe,  is  a  tax  on  gross  rent.     In  most  of 

1  Infra,  chap.  vi.      '^  Infra,  chap.  tL      ^  Supra,  p.  280. 


Taxes  on    Urban  Real  Estate  299 

the  continental  states  it  is  imposed  on  the  owner  of  the 
house ;  in  Scotland  it  is  divided  between  the  owner  and  the 
occupier;  in  England  it  is  imposed,  with  the  exception  noted 
above,^  on  the  occupier.  This  is  true  not  only  of  the  national 
tax,  known  as  the  inhabited  house  duty,  but  of  the  entire 
system  of  local  rates.  The  English  system  is  the  more  com- 
plicated one,  because  the  problem  of  incidence  is  not  only  as 
between  the  occupant  and  the  owner,  but  as  between  the 
occupant,  the  house  owner,  and  the  site  owner ;  and  when 
the  interests  of  the  land  are  divided,  as  between  the  ultimate 
reversioner,  the  lease  holder,  or  the  other  beneficial  par- 
ticipant in  the  land.  We  shall  accordingly  make  the  English 
tax  the  basis  of  our  discussion.  The  general  rules  of  inci- 
dence are  indeed  the  same  whether  the  tax  be  paid  in  first 
instance  by  owner  or  by  occupier;  but  important  modifica- 
tions of  the  general  theory  may  be  brought  about,  as  we 
shall  see,  by  the  existence  of  friction,  which  will  put  a  differ- 
ent complexion  on  the  practical  results. 

The  discussion  as  to  the  incidence  of  the  local  rates  in 
England  has  led  to  heated  political  controversies,  and  has 
been  embittered  by  the  fact  that  the  welfare  of  the  land- 
lords, or  other  parties  in  interest,  may  be  adversely  affected 
by  the  conclusions  if  embodied  in  legislation.  The  treatment 
of  the  subject  by  the  economists,  on  the  other  hand,  has 
sometimes  been  beclouded  by  an  over-refinement  of  argu- 
ment, resulting  in  what  has  been  wittily  called  the  "  goodncss- 
knows-who"  doctrine.^  Let  us  attempt,  in  the  following 
discussion,  to  conform  to  economic  principles  without  expos- 
ing ourselves  to  the  rigor  of  the  above  strictures. 

^  Supra,  p.  276,  note. 

"^  "The  economic  theorist's  answer  to  the  question  :  Who  pays  rates  ?  is,  that 
deceased  landlords,  landlord  and  tenant,  all  pay  rates,  and  that  the  proportions 
in  which  they  respectively  do  so  vary  not  only  from  place  to  place,  but  according 
to  an  infinite  number  of  circumstances,  most  of  which  are  incalculable,  and  in- 
capable of  being  expressed  in  delmite  terms.  Briefly  expressed,  it  is  simply  this: 
Goodness  knows.  Vox  practical  purposes  this  answer  is  useless.  It  is  impossible 
to  produce  a  scheme  of  finance  if  the  taxpayers  are  goodness  knows  who." — J.  Row- 
Fogo,  An  Essay  on  the  Reform  of  Local  Taxation  in  England,  1902,  p.  no. 


300  Shifthtg  and  Incidence  of  Taxation 

Before  entering  upon  the  general  argument  it  may  be 
well  to  call  attention  to  an  infelicity  of  treatment  which 
is  not  infrequently  found  among  the  earlier  economists. 
Many  writers,  from  the  time  of  Adam  Smith  and  espe- 
cially since  John  Stuart  Mill,^  mindful  of  the  distinction 
between  ground  rent  and  building  rent,  have  attempted  to 
divide  the  tax  on  house  rentals  into  two  portions,  the  one 
being  the  tax  on  the  site,  the  other  the  tax  on  the 
building.  They  have  then  proceeded  to  work  out  sepa- 
rately the  incidence  of  each  of  these  two  portions  of  the 
tax  and  to  combine  them  at  the  end.  This  method  of 
procedure,  however,  seems  inappropriate  chiefly  for  the 
reason  that  we  are  seeking  to  combine  what  are  essen- 
tially disparate  things.  The  rent  of  the  site  is  the  net 
rent;  but  the  rent  of  the  house  is  the  gross  rent.  To 
attempt  to  separate  the  entire  rental  paid  for  a  house  into 
the  net  rent  of  the  land  and  the  gross  rent  of  the  building 
is  therefore  as  ill-advised  as  it  would  be,  in  discussing  a 
tax  on  pianos,  to  divide  it  into  two  parts,  one  of  which 
corresponds  to  the  rent  of  the  land  which  produced  the 
raw  material.  A  house  is  a  commodity  which  cannot  be 
occupied  without  enjoying  the  use  of  the  land  on  which 
the  house  is  situated ;  just  as  a  piano  is  a  commodity 
which  cannot  be  utilized  without  the  enjoyment  of  some- 
thing which  is  also  ultimately  due  to  the  services  of  the 
soil.  In  the  case  of  the  house  the  service  afforded  by 
the  land  is  an  immaterial  one,  that  of  support ;  in  the  case 
of  pianos  the  service  of  the  land  incorporates  itself  into  the 
material  shape  of  lumber.  There  is  as  little  reason  in  the 
one  case  as  in  the  other  to  attempt  to  divide  the  tax  into 
two  parts.     If  pianos  in    a    certain  community  are    usually 

^  Political  Economy,  book  v,  chap.  3,  §  6.  Cf.  Sidgwick,  Principles  of  Political 
Economy,  book  iii,  chap,  viii,  §  8,  and  more  recently  Courtney  in  Memoranda, 
p.  86:  "So  much  of  the  house  duty  as  was  proportioned  to  this  [the  ground]  rent 
and,  so  to  speak,  attached  to  it,  would  be  ultimately  borne  by  the  person  entitled 
to  receive  this  rent."  Cf.  also  Marshall,  Principles,  5th  ed.,  p.  453,  book  v,  chap.  11, 
§  7:  "The  rent  of  a  house  is  a  composite  rent,  of  which  one  part  belongs  to  the 
site,  and  the  other  to  the  buildings  themselves." 


Taxes  on   Urba^i  Real  Estate  301 

rented,  a  tax  on  the  person  who  uses  the  piano  is  in  this 
respect  precisely  like  a  tax  on  the  occupant  of  a  house,  and  it 
would  surely  be  inappropriate  to  divide  the  piano  tax  into 
two  parts,  one  of  which  was  the  ground  rent  and  the 
other  the  piano  rent.^  In  the  case  of  a  tax  on  the  selling 
value  of  the  house,  discussed  in  a  previous  section,  it  was 
permissible  to  differentiate  the  tax  into  the  two  constituent 
elements  of  the  tax  on  the  house  proper  and  the  tax  on 
the  site,  because  it  is  entirely  practicable  to  separate  the 
house  from  the  site.  A  house  can  be  sold  to  be  removed 
or  torn  down,  without  the  owner  parting  with  the  land. 
But  a  house  cannot  be  rented,  unless  the  occupant  at  the 
same  time  utilizes  the  services  of  the  land ;  in  renting  the 
house,  he  is  renting  the  land.  In  discussing  the  incidence 
of  a  tax  on  house  rents,  therefore,  it  seems  best  to  treat 
it  as  a  whole. 

Taking  up  then  the  question  of  the  incidence  of  local  rates, 
it  may  be  said  that  in  general,  in  case  of  progressive  com- 
munities, the  owner  of  the  building  may  be  eliminated  from 
consideration.  By  universal  consent  it  is  agreed  that  where 
the  tax  is  an  exclusive  tax  (as  in  the  case  of  the  local  rates) 
or  a  special  tax  (as  in  the  case  of  the  inhabited  house  duty) 
the  building  owner  will  not  bear  any  part  of  the  burden. 
For  if  his  profits  were  reduced,  building  operations  would 
cease,  until  the  shortage  in  the  supply  would  again  cause 
house  rents  to  rise.  The  argument  is  precisely  similar  to  the 
one  mentioned  above  ^  and  subject  to  the  same  qualifications 
in  the  case  of  non-progressive  or  decaying  localities. 

1  Cf.  Edgeworth,  Economic  Journal,  vii  (1897),  PP-  65-66,  and  x  (1900),  pp. 
190-193.  I  cannot,  however,  agree  with  Professor  Edgeworth  when  he  makes 
his  opposition  to  the  older  doctrine  turn  upon  the  fact  of  an  ecjual  degree  of 
elasticity  of  demand  in  the  case  of  houses  and  of  ordinary  commodities.  Sec  the 
next  paragraph. 

'^  Supra,  pp.  288-293.  For  another,  but  hypothetical  exception,  see  below, 
p.  292.  Still  another  possible  exception  is  mentioned  by  Professor  Edgeworth 
in  Economic  Journal,  vii,  p.  68,  following  Pantaleoni  :  "  Perhaps  the  investments 
which  are  open  as  an  alternative  to  the  intending  builder  are  not  indchnitily 
extensive   in   comparison  with   the  house-building  industry,"  in  which  case  the 


302  Shifting  and  Incidence  of  Taxation 

The  real  problem,  therefore,  is  as  to  whether  the  local  rate 
falls  on  the  occupier  or  on  the  landowner.  By  some  it  is 
held  that  the  local  rate  is  borne  entirely  by  the  landowner. 
The  argument  would  be  something  like  the  following. 

The  tax  will  be  shifted  in  first  instance  by  the  occupier  to 
the  house  owner,  it  is  said,  because,  when  the  tenant  takes 
out  his  lease,  he  will  make  a  deduction,  measured  by  the 
height  of  the  tax,  from  his  rent.  He  will  offer  only  so  much 
rent  as  is  warranted  by  the  superiority  of  the  site ;  and  this 
superiority  is  not  increased  by  the  imposition  of  a  tax.  To 
this  extent,  then,  the  tax  will  fall  on  the  house  owner.  But 
the  building  owner  will  shift  the  tax  to  the  owner  of  the  land. 
As  Goschen  has  put  it :  "  The  builder  calculates  on  a  certain 
profit,  or  else  he  would  not  build ;  he  knows  that  tenants  of  a 
certain  class  can  afford  to  give  a  certain  rent  and  no  more 
for  a  certain  kind  of  house ;  and  therefore  if  building  is  to 
take  place  at  all,  it  is  clear  that  the  rates  must  fall  there 
where  alone  a  margin  exists  to  bear  them ;  that  is  to  say,  on 
the  price  given,  or  ground  rent  promised  to  the  owner  of  the 
soil."^ 

The  contention,  however,  that  the  tax  falls  wholly  or  neces- 
sarily on  the  ground  owner  is  obviously  incorrect  in  at  least 
two  particulars.  In  the  first  place,  the  ground  rent  might 
be  so  low  and  the  rates  so  high  that  the  builders  could  not 
afford  to  erect  any  more  houses.  They  could  not  hire  the 
land  for  any  less,  because  the  ground  rents  would  be  so 
low  that  the  owner  would  prefer  to  use  the  land  for  other 
purposes  rather  than  submit  to  a  reduction.  The  result 
would  be  a  diminution  in  the  supply  of  houses  and  a  conse- 
quent rise  of   rent  to  the   tenant  or  consumer.     This  first 

house  builder  will  be  "  obliged  to  submit  in  consequence  of  the  house  tax  to  some 
permanent  reduction  in  profits."  But  as  Professor  Edgeworth  himself  says,  this 
is  very  "  pure  theory."  In  practice  it  never  happens.  Einaudi  also  discusses 
this  in  several  places. 

1  Goschen,  "  Draft  Report,"  etc.,  op.  cit.  {cf.  for  title,  supra,  p.  273,  note  i), 
p.  166.  The  same  idea  is  shared  by  others.  The  evidence  given  before  the  Select 
Committee  on  Local  Taxation  in  1870  contains  every  possible  view.  Cf.  esp. 
questions  1276,  2731,  2739,  321 1,  3404  and  4050. 


Taxes  on  Urban  Real  Estate  303 

condition,  however,  will  arise  very  rarely,  and  may  be  passed 
over  as  unimportant.^ 

Secondly,  the  argument  that  the  tax  falls  on  the  landowner 
rests  on  the  assumption  that  at  the  beginning  of  every  lease 
the  lessee  will  demand  that  allowance  be  made  for  the  tax. 
This  assumption  is,  however,  not  of  much  use  in  the  case  of 
long  leases.  After  a  long  lease  has  been  taken  out,  an  unex- 
pected change  may  occur  in  the  rates ;  in  fact,  the  growing 
tendency  of  modern  local  taxation  is  toward  an  increase. 
The  landowner  who  has  fixed  the  ground  rent  for  a  number 
of  years  will  still  get  this  rent,  irrespective  of  any  growth  of 
rates.  The  increased  burden  cannot  then  be  shifted  on  him ; 
it  must  be  borne  by  the  occupier  who  advances  the  tax.  Not 
until  the  expiration  of  the  lease  will  the  tenant  be  able  to 
make  a  new  arrangement  by  which  he  will  try  to  shift  the 
burden  on  the  owner.  Thus,  only  in  the  case  of  short 
tenancies,  could  it  happen  that  the  tax  would  fall  on  the 
owner.  In  all  those  cases  —  especially  numerous  in  England 
—  where  the  occupier  rents  for  a  term  of  years,  the  excess  of 
any  rates  beyond  the  amount  calculated  in  the  original  lease 
necessarily  falls  on  the  occupier.^  The  important  point  to  be 
noticed  is  the  time  of  the  original  imposition  of  the  tax  —  a 
point  too  often  neglected.     If  the  owner  were  assessed  for 

^  Mr.  Goschen  himself  makes  allowance  for  this. 

2  Cf.  Professor  Edgeworth's  remarks  in  reference  to  the  project  of  dividing  the 
rates  between  the  owner  and  the  occupier:  "So  far  it  has  been  supposed  that  oc- 
cupiers' leases  are  short,  otherwise  it  would  not  be  true  that  division  between 
occupier  and  owner  is  a  small  matter.  It  is  not  true  of  a  twenty-one  years'  lease, 
such  as  not  uncommonly  occurs  in  the  case  of  high-class  residences,  open  to  the 
tenant  only,  but  not  to  the  landlord,  to  terminate  at  the  end  of  seven  or  fourteen 
years."  Economic  Journal,  x,  490.  So  Mr.  Costelloe  in  his  testimony  before  the 
Royal  Commission  on  Local  Taxation  states  that  as  a  rule  the  "  pull  of  the  mar- 
ket"  is  against  the  tenant,  and  that  the  recent  continual  increases  of  rales  "do, 
in  fact,  come  out  of  the  pockets  of  the  occupiers  and  out  of  their  living,  and  that 
they  cannot  be  fairly  considered  as  being  borne  in  any  intelligible  sense  by  the 
receivers  of  rent."  See  questions  19923-5,  20252-60  and  20433-8,  and  vol.  ii 
oi  Minutes  of  Evidence,  app.  no.  xi,  pars.  48,  49.  For  the  views  of  the  witnesses 
in  general  on  this  point  see  the  summary  in  A.  W.  Pox,  The  Rating  of  l^nd 
Values,  1906,  pp.  24-30. 


304  Shifting  and  Incidence  of  Taxation 

the  taxes  in  first  instance,  as  on  the  continent,  the  case 
might  be  different.  But  if  the  occupier  advances  the  tax, 
he  cannot  improve  his  condition  until  the  expiration  of 
the  lease. 

Apart  from  this  consideration,  however,  how  does  the  mat- 
ter stand  with  a  tax  assessed  on  the  occupier  in  the  ordinary- 
case  of  short  leases.-*  In  the  preceding  paragraph  it  has  been 
taken  for  granted  that  at  the  beginning  of  each  short  lease 
the  tenant  will  insist  on  a  reduction  of  the  rent  as  a  compen- 
sation for  the  local  rates  assessed  upon  him.  Only  on  this 
assumption  will  the  owner  ultimately  bear  the  taxes.  But  is 
this  assumption  always  correct.-*  The  real  question  is:  Who 
bears  the  taxes  in  the  case  of  short  leases  or  tenancies  by  the 
year,  the  quarter,  or  —  as  is  the  case  with  the  majority  of  the 
tenement  house  population  —  the  month  or  the  week? 

Even  in  the  case  of  short  and  easily  readjustable  leases,  the 
contention  that  the  local  rate  falls  entirely  on  the  landowner 
ignores  the  many  reasons  which  tend  to  make  the  tax  rest  on 
the  occupier.  Accordingly  the  great  majority  of  scientific 
writers  agree  that  a  part  of  the  tax  will  be  borne  by  the  oc- 
cupier, and  claim  only  that  the  remaining  portion  of  the  tax 
will  settle  on  the  landowner.  Even  with  this  contention, 
however,  we  must  take  issue.  For  it  is  in  our  opinion  sus- 
ceptible of  proof  that  in  ordinary  cases  the  tax  will  be  borne 
entirely  by  the  occupier,  or  at  all  events  that  only  an  insig- 
nificant part,  if  any,  and  a  part  far  smaller  than  is  generally 
supposed,  will  rest  on  the  landowner. 

Let  us  lead  up  to  the  ordinary  case  by  considering  first  the 
exceptional  or  extraordinary  cases.  If  we  take  a  broad  view 
of  the  situation,  we  shall  find  that  there  are  really  three  im- 
portant possibilities.^     These  may  be  summed  up  as  : 

(^A)  where  the  supply  of  building  lots  is  abundant,  as  in 
the  suburbs  or  in  sections  of  dwindling  prosperity,  where 
there  are  many  unrented  houses  or  at  all  events  where  it  does 
not  pay  to  build  any  more  houses ;  i^E)  where  the  supply  of 
buildings  on  new  lots  just  about  keeps  pace  with  the  demand  ; 

^  For  the  unimportant  possibilities,  see  below,  p.  317. 


Taxes  on   Urban  Real  Estate  305 

and  ((7)  where  the  supply  of  building  lots  is  exhausted,  and 
the  number  of  houses  may  be  considered  as  constant.^ 

Case  A  is  not  attended  with  much  difficulty.  If  the  lot  is 
situated  in  any  outlying  section,  or  in  a  decaying  portion  of  a 
town  where  the  demand  is  slack,  the  tax,  even  if  advanced 
by  the  tenant,  will  be  shifted  to  the  landlord.  The  occupier 
can  afford  to  choose,  and  will  not  voluntarily  assume  the  bur- 
den of  any  one  else.  Being  in  the  stronger  position,  he  will 
not  consent  to  pay  the  higher  rent  due  to  the  imposition  of 
the  tax.  This  will  hold  good,  however,  only  so  long  as  the 
decay  is  continuous.  As  soon  as  the  decay  is  arrested,  we 
have  the  conditions  of  case  B  to  be  discussed  in  a  moment. 

Case  C  likewise  presents  little  difficulty.  Let  us  assume 
the  existence  of  a  walled  town  where  every  plot  is  occupied, 
or  a  section  of  the  city  which,  through  some  combination  of 
circumstances,  is  the  only  one  fitted  for  a  certain  kind  of  busi- 
ness, and  where  all  the  land  is  covered  with  buildings.  In 
such  a  case,  the  owner  has  a  virtual  monopoly,  and  will  exact 
the  highest  rent  that  the  tenant  can  pay.  If  a  tax  is,  then, 
imposed  on  the  tenant,  it  will  be  shifted  to  the  owner,  on  the 
general  theory  of  the  taxation  of  monopoly  profits ;  for,  ac- 
cording to  the  hypothesis,  the  owner  has  already  exacted  the 

1  A  somewhat  similar  classification  is  given  by  Dr.  N.  G.  Pierson,  at  one  time 
Prime  Minister  of  Holland,  in  his  Leerboek  der  Staatkuishoudkunde  (2il  ed., 
1896),  pp.  156,  157  and  174-185;  English  translation,  Principles  of  Economics, 
vol.  i,  1902,  pp.  140-141  and  151-167.  Mr.  Pierson  distinguishes  four  cases:  first, 
where  there  is  an  abundance  of  building  lots,  as  in  the  country,  and  where  the 
ground  rent  accordingly  amounts  to  little  or  nothing;  second,  where  the  locality 
is  decaying,  and  rents  fall  below  the  ordinary  return  on  the  capital  invested  in  the 
house,  and  where  the  ground  rent  is  also  zero;  third,  where  there  is  a  rentless 
margin  on  the  outskirts  of  the  city  with  an  interior  area  within  which  ground 
rents  form  a  considerable  portion  —  larger  as  we  approach  the  centre — t)f  the 
total  house  rent;  fourth,  where  all  the  building  lots  are  occupied,  ami  where  the 
supply  of  houses  may  be  considered  constant. 

This  classification,  it  will  be  seen,  has  many  points  in  common  with  the  dis- 
tinctions in  the  text.  Mr.  Pierson  thinks  that  when  a  tax  is  imposed  on  houses, 
the  result  will  be  that  in  the  first  case  the  ordinary  law  applicable  to  manufactured 
commodities  will  obtain  and  rents  will  rise;  and  that  in  the  second  and  fourth 
cases,  no  influence  on  house  rents  will  be  perceptible.  This  solution  of  the  third 
case  will  be  considered  immediately  below. 


3o6  Shifting  and  Incidence  of  Taxation 

uttermost  farthing  from  the  tenant.  Could  the  tenant  pay 
an  increased  rent  —  that  is,  the  old  rent  plus  the  new  tax  — 
the  landlord  would  have  exacted  this  before  the  imposition  of 
the  tax.  In  the  same  way,  a  remission  of  an  existing  tax  on 
the  occupier  would  enure  to  the  owner,  through  an  increase 
of  the  rent  charged  to  the  occupier.  Thus,  in  the  case  of  a 
monopoly  site,  as  well  as  in  the  reverse  case  of  a  site  which 
goes  begging  for  a  tenant,  a  tax  on  house  rent  assessed  on 
the  occupier  will  be  shifted  to  the  owner. 

The  same  would  be  true  even  if  we  do  not  invoke  the 
theory  of  monopoly,  and  regard  the  situation  simply  as  one 
where  it  is  impossible  to  build  any  more  houses,  with  an 
active  competition  among  the  existing  house  owners.  For  if 
the  supply  of  a  commodity  cannot  be  increased,  it  is  well  set- 
tled that  a  tax  imposed  on  it  must  be  borne  by  the  owner. 
As  has  been  well  said :  "  The  supply  of  houses  being  per- 
fectly inelastic,  the  owners  have  no  choice  but  to  throw  these 
their  wares  upon  the  market  without  a  reserve  price ;  they  must 
accept  that  price  which  just  carries  off  the  supply.  Since  the 
imposition  of  the  duty  does  not  increase  the  demand  of  the 
occupants,  the  payment  per  house  which  they  can  be  got  to 
make  will  not  be  increased."  ^ 

This  case  C,  however,  is  only  of  theoretic  interest.^  Prac- 
tically, it  never  exists.  The  mediaeval  walled  towns  which 
were  increasing  in  population  always  reserved  some  vacant 
building  space  within  the  walls.  As  soon  as  this  was  ex- 
hausted, the  walls  were  enlarged  or  the  surplus  population 
was  swept  beyond  the  walls.  In  modern  times,  again,  there 
is  not  only  no  such  thing  as  the  impossibiUty  of  building  new 

^  Edgeworth  in  Memoranda,  p.  129.  This  is  worked  out  more  fully,  with  the 
aid  of  diagrams  in  Economic  Journal,  vii,  pp.  49-50. 

2  Einaudi  heaps  Ossa  upon  Pelion  by  adding  to  this  purely  theoretical  case  the 
practically  impossible  variation  of  the  tax  on  house  rent  being  so  high  as  to 
swallow  up  the  entire  net  rent.  Op.  cit.,  p.  161.  On  this  hypothesis,  some  land- 
lords, he  thinks,  will  leave  their  houses  vacant,  thus  leading  to  an  increase  in  the 
rents  of  the  remaining  houses,  so  that  the  occupier  would  also  suffer.  "The  amount 
of  the  tax  so  added  to  the  rent  would  depend  on  the  proportion  of  rented  to 
unrented  houses." 


Taxes  on  Urban  Real  Estate  307 

houses,^  but  there  is  also  no  such  thing  as  a  strict  monopoly 
of  building  sites.  The  ground  rent  of  even  the  dearest  plot 
in  a  crowded  city  exceeds  the  ground  rents  of  other  plots  only 
by  the  value  of  its  relative  superiority.  Monopoly  implies 
absolute  control  of  supply.  Where  building  lots  shade  into 
each  other  by  imperceptible  gradations,  with  an  abundant 
supply  of  the  lower-grade  lots,  we  cannot  speak  of  an  absolute 
control  of  the  total  supply,  but  only  of  a  control  of  a  part 
of  the  supply.  This  is  not  monopoly,  but  only  the  owner- 
ship of  a  better  grade,  possession  of  which  gives  a  higher 
price,  but  not  a  monopoly  price. 

Let  us  therefore  leave  these  purely  hypothetical  examples 
and  take  up  the  really  important  practical  problem,  namely, 
case  Bf  which  is  the  ordinary  case  in  normal  communities. 
It  is  the  case  of  a  district  growing  in  population  and  pros- 
perity, where  there  is  an  ever-increasing  demand  for  building 
lots,  but  where  the  increase  of  ground  rent  is  limited  by  the 
possibility  of  utilizing  unbuilt  land  in  less  favored  sections. 
Rents  in  the  crowded  slums,  or  in  a  favored  business  section, 
will  continually  rise;  but  at  any  given  moment  the  rise  is 
limited  to  the  differential  advantages  which  a  particular 
neighborhood  possesses  over  other  possible  sites.  With  the 
increase  of  population,  there  is  a  continual  increase  of  house 
accommodation  in  the  wider  periphery.  The  possibility  of 
getting  an  equally  good  apartment  a  little  further  off  will  keep 
the  rent  of  the  better  situated  apartment  down  to  the  level  of 
the  other,  plus  an  addition  due  to  the  advantages  of  the  better 
situation.  Rents  in  the  slums  are,  indeed,  higher  than  rents  in 
the  suburbs  ;  but  the  former  exceed  the  latter  chiefly  because 
of  the  saving  in  car-fare,  and  because  of  the  assumed  social 
benefits  of  life  in  a  crowded  city.  Any  effort  to  put  rents 
above  this  margin  of  advantage  would  inevitably  fail. 

^  Pierson,  op.  cit.,  p.  141,  thinks  that  an  example  is  afforded  by  towns  encircled 
by  high  mountains  or  deep  waters.  But  even  deep  waters  may  be  bridged,  and 
as  to  high  mountains,  all  that  is  needed  to  make  a  town  run  up  a  mountain  slope 
is  the  increasing  demand  for  houses,  as  is  evident  to  any  one  who  contemplates 
the  recent  growth  of  some  of  the  Swiss  mountain  resorts. 


3o8  Shiftifig  and  Incidence  of  Taxation 

It  is  here  that  opinions  diverge  as  to  the  incidence  of  a  tax 
on  house  rent.  Some  writers  think  that  a  large  part  of  the  tax 
will  be  borne  by  the  landowner ;  others  believe  that  a  smaller 
part  will  be  so  borne.  Our  opinion  is  that  the  portion  ordi- 
narily borne  by  the  landowner  is  so  insignificant  that  it  may 
well  be  disregarded. 

Among  those  who  believe  that  a  large  part  of  the  tax  will 
fall  on  the  landowner,  perhaps  the  most  prominent  is  Dr.  Pier- 
son.i  His  solution  is  as  follows  :  At  the  outskirts  or  the 
margin  of  building,  where  the  demand  for  new  houses  in- 
creases with  the  growth  of  population,  the  imposition  of  a  tax 
will  cause  the  rents  to  rise  by  the  amount  of  increase  in  the 
cost  of  production  of  houses,  i.e.  by  the  amount  of  the  tax. 
This  influence  of  the  augmented  rent  in  the  suburbs  will  be 
transmitted  to  houses  in  the  centre  of  the  town,  but  the  in- 
crease in  the  house  rents  in  the  more  favorably  located  areas 
cannot  exceed  the  increase  in  the  rents  at  the  outskirts.  Since 
the  site  values  or  ground  rents  are  higher  in  this  central  area, 
while  similar  houses  cost  the  same  all  over  the  city,  it  follows, 
in  his  opinion,  that  inasmuch  as  the  rents  in  the  central  area 
increase  at  most  only  by  the  same  amount  as  those  in  the 
suburbs,  the  percentage  of  increase  in  the  central  area  will 
be  smaller,  so  that  the  landlord  will  bear  a  portion  of  the  tax 
—  a  portion  which  will  grow  larger  in  proportion  as  the 
ground  rent  exceeds  the  house  rent.^ 

^  Blunden,  Memoranda,  p.  199,  is  mistaken  in  classing  Pierson  with  me.  He 
seems  to  have  depended  on  some  quotations  made  by  Professor  Edgeworth.  — 
Among  the  few  Englishmen  who  hold  the  same  opinion  is  Sir  Robert  Giff en : 
*'  The  idea  of  a  separate  rating  of  ground  value  arises  from  a  misunderstanding 
of  the  real  incidence  of  rates.  As  that  burden  falls  ab  initio  on  the  ground  land- 
lord, diminishing  the  sum  of  capital  or  income  he  is  able  to  obtain  for  his  prop- 
erty, there  is  really  no  separate  ground  value  to  be  assessed."  —  Memoranda,  p.  97. 

2  This  illustration  is  as  follows:  Of  houses,  one  in  a  fashionable  neighborhood 
fetches  /^200  rent,  another  in  the  suburbs  where  there  is  no  ground  rent  fetches 
;^6o.  The  difference  is  ;i^i40.  Now  a  tax  of  twenty-five  per  cent  is  imposed. 
Then  ;^250  will  be  paid  for  the  first  house,  and  £']i,  for  the  second.  But  since 
the  difference  between  the  rents  is  now  £,\']S,  "  it  is  obvious  that  an  anomaly  has 
arisen,  which  must  in  some  way  be  got  rid  of."  For  the  real  difference  between 
them  is  by  hypothesis  only  £,\^o.     Since  there  cannot  be  any  rise  in  the  rent  of 


Taxes  on    Urban  Real  Estate  309 

This  reasoning  is  ingenious,  but  overlooks  the  fact  that  the 
tax  is  not  of  fixed  amount,  but  a  percentage  tax  calculated 
according  to  the  total  rentals  of  the  premises  which  constitute 
entirely  different  magnitudes.  Such  a  tax  will  accordingly 
increase  the  rental  of  the  better  situated  houses  by  more  than 
the  increase  of  the  rental  in  the  poorly  situated  houses.  Since 
the  tax,  although  at  the  same  rate,  will  amount  to  a  larger 
sum  in  the  one  case  than  in  the  other,  it  is  similar  to  a  per- 
centage or  proportional  tax  on  different  quantities  of  produce 
raised  on  lands  of  various  grades,  which  as  John  Stuart  Mill 
pointed  out  will  increase  the  price  of  the  produce  and  thus 
fall  on  the  consumer.^  There  is  hence  no  justification  for  the 
claim  that  as  we  reach  the  central  areas  of  the  town  more  and 
more  of  the  tax  will  be  borne  by  the  landowner.^ 

the  cheaper,  there  must  be  a  fall  in  the  rent  of  the  dearer  house,  which  will  there- 
fore be  only  ;^2I5  (;^75  +  Ho)-  B^^'  ^^'^  means  that  the  rent  of  the  dearer 
house,  exclusive  of  tax,  is  £1^2  {L'^T^  +  25%  =  ^1^215),  and  since  the  rent  of 
the  house  proper  is  by  supposition  ;{^6o,  this  leaves  as  ground  rent  only  ;^II2  as 
against  the  original  /"140,  a  diminution  of  ;i^28,  or  exactly  25%.  "From  this  it 
follows  that  the  tax,  so  far  as  it  is  based  on  that  portion  of  the  rent  which  consists 
of  ground  rent,  is  borne  by  the  owner  of  the  house."  —  Principles  of  Economics, 
vol.  i,  p.  162.  In  fact,  Pierson  goes  still  further,  and  after  some  more  elaborate 
calculations  concludes  that  "  a  tax  based  upon  rents  and  levied  from  Ihe  occupier 
of  houses,  must  react  upon  ground  rents  to  an  extent  at  hast  as  great  as  has  been 
shown  by  our  calculations,  but  it  may  react  upon  them  to  a  still  greater  extent." 
Ibid.,  p.  164.  A  similar  arithmetical  argument  is  employed  to  show  that  the  same 
result  would  be  true  of  a  tax  assessed  on  the  selling  value  of  the  house,  and  im- 
posed on  the  owner.     This  is  the  case  mentioned  above,  pp.  288  et  seq. 

1  Cf.  the  passage  of  Mill  quoted  above,  p.  261,  note  I.  The  ultimate  results 
adverted  to  on  that  page  are  not  pertinent  in  this  particular  connection,  but  will 
be  mentioned  below.  Mill  is  here  quoted  simply  to  show  that  as  Professor  Edge- 
worth  well  remarks  in  Memoranda,  p.  130,  "there  is  no  'anomaly'  [as  Pierson 
thinks]  in  the  supposition  that  the  difference  between  the  prices  paid  for  these 
two  quantities  of  produce  should  be  increased  by  a  tax." 

'^  Professor  Edgevvorth  puts  the  point  with  his  customary  lucidity:  "  Mr.  Pier- 
son's  assumption  [that  the  difference  between  the  rents  of  the  two  houses  may  be 
expected  to  be  the  same  after  and  before  the  imposition  of  the  tax]  would  be 
appropriate  if  two  similar  houses  dissimilarly  situated  could  be  regarded  as  two 
units  of  the  same  commodity,  analogous  to  two  quarters  of  barley  grown  on  a 
highly  rented  site  and  at  the  margin  of  cultivation  respectively.  But  I  submit 
that  the  two  houses  ought  rather  to  be  regardetl  as  different  quantities  of  com- 
modity analogous  to  the  quantities  of  barley  produced  by  the  outlay  of  the  same 


3IO  Shifting  mid  Incidence  of  Taxation 

But  if  the  landowner  does  not  bear  the  entire  burden,  nor 
even  the  greater  part  of  the  tax  on  house  rentals,  does  he 
bear  a  considerable,  or  even  an  appreciable,  part  ?  An 
affirmative  answer  is  given  by  a  large  number  of  writers.^ 
This  conclusion  rests,  however,  on  the  general  presumption 
that  an  increase  in  the  price  of  a  commodity  due  to  a  tax 
usually  leads  to  a  diminution  in  sales,  with  a  possible  ensuing 
loss  to  the  producer.  In  other  words,  the  increase  of  house 
rentals  caused  by  the  tax  will  lower  the  demand  for  building 
sites,  and  lead  to  a  general  reduction  of  ground  rents 
throughout  the  community. 

It  is  here  submitted,  however,  that  this  argument  fails  to 
take  notice  of  those  important  countervailing  influences, 
which  differentiate  house  accommodation  from  the  general 
mass  of  consumable  commodities  or  enjoyments.  These  are, 
first,  the  relation  of  the  house  owner  to  the  landlord ; 
secondly,  the  peculiar  character  of  the  demand  for  houses ; 
and  thirdly,  the  existence  of  economic  friction.  Let  us  con- 
sider these  in  turn. 

In  the  first  place,  it  must  be  remembered  that  when  a  man 
rents  a  house  and  agrees  to  pay  taxes  in  addition  to  the  rent, 
he  does  not  make  a  formal  distinction  between  the  tax  on 
building  rent  and  the  tax  on  ground  rent.  He  is  simply 
conscious  of  the  fact  that  a  house  in  a  better  neighborhood 
costs  more  than  an  equally  good  house  in  a  poorer  neigh- 
capital  at  the  margin  and  on  a  highly  rented  site." — Memoranda,  p.  130,  note. 
Professor  Edgeworth's  own  solution  of  the  problem  is  one  of  the  subtle  over-re- 
finements of  which  he  is  so  fond.  He  thinks  that  this  is  one  of  the  instances  of 
what  he  calls  the  case  of  correlated  commodities,  resulting  in  the  paradox  that  a 
tax  on  one  of  two  correlated  commodities  may  increase  the  producers'  surplus. 
Cf.  Economic  Journal,  vii,  p.  55.  Hence  "a  tax  on  house  rent  might  so  disturb 
the  balance  of  demand  for  urban  and  suburban  accommodation  respectively, 
as  to  cause  a  positive  benefit  to  the  owners."  —  Ibid.,  p.  62.  In  another  place, 
however,  Professor  Edgeworth  concedes  that  "  this  curiosum  in  the  theory  of  value 
seems  only  to  be  of  importance  as  it  tends  to  confirm  the  conclusion  that  the 
occupier  will  bear  a  considerable  portion  of  the  tax."  —  Memoranda,  p.  130. 

^  As,  e.g.,  by  many  of  the  "experts"  who  gave  their  written  testimony  in  the 
Memoranda,  such  as  Professors  Marshall,  Edgeworth,  Bastable,  Conner,  Cannan 
and  Price. 


Taxes  on   Urban  Real  Estate  311 

borhood,  and  that  the  local  rates  which   he  is  called  upon 
to  pay  are  by  so  much  the  larger.     If  an  additional  tax  is  im- 
posed on  the  rental,  it  is  indeed  conceivable  that  the  tenant 
will  content  himself  with   meaner   apartments   in   the   same 
neighborhood,  or  will  seek  equally  good  rooms  in  a  less  de- 
sirable locality.     In  such  a  case,  the  decreased  demand  for 
the  original  house  might  induce  the  house  owner  to  be  satis- 
fied with  a  lower  rent,  and  he  in  turn  would  endeavor  to  shift 
the  loss  to  the  owner  of  the  land.     But  is  it  true,  as  Adam 
Smith  says,  that  "  the   more   the  inhabitant  was  obliged  to 
pay  for  the  tax,  the   less   he  would   incline  to   pay  for  the 
ground  "  }^    Is  it  not  rather  the  case  that,  as  we  have  pointed 
out  above,^  a  tax  on  the  owner  of  the  building  can  be  shifted 
to  the  owner  of  the  land  only  in  the  exceptional  and  even 
purely  hypothetical  case  of  the  tax  being  so  high  as  to  make 
the  house  owner  willing  to  abandon  the  house?     Moreover, 
the  argument  that  the  tax  will  be  shifted  to  the  landowner 
overlooks  the  important  consideration  that  houses  are  not  in 
all  respects  comparable  to  ordinary  commodities.     If  a  tax  is 
imposed,  for  instance,  on  candles,  the  rise  in  price  may  lead 
to  a  fall  in  the  consumption  of  candles  in  general,  and  to  the 
use  of  a  substitute.     But  if  a  tax  is  imposed  on  house  rents, 
while  the  rise  of  rents  may  bring  about  a  decrease  in  the 
demand  for  some  houses,  it  cannot  mean  that  the  demand 
for  houses  in  general  has  receded.     For  given  a  progressive 
city,  or  a  population  which  is  not  diminishing,  the  total  de- 
mand for  house  accommodation  will  not  be  lessened.     If  the 
tenant,  as  suggested  above,  seeks  poorer  rooms  because  of 
the  tax,  the  demand  for  the  poorer  rooms  will  increase,  and 
this  will  mean  more  houses  of  this  kind,  and   hence  an  in- 
crease in  the  ground  rents  of  such  houses.     In  other  words, 
we  should  have  a  readjustment  of  ground  rents  throughout 
the  city,  with  an  increase  in  some  sections  and  a  decrease  in 
others.      The    net   result  will  in  all   probability  not   be  an 
appreciable  rise  of  ground  rents  in  general.^     Hence,  even 

1  Wealth  of  Nations,  book  v,  chap.  ii.  "  Supra,  p.  200. 

8  The  truth  of  this  statement  is  attested  by  I'rofcssor  Edgcworth  in  the  follow- 


312  Shifting  and  Incidence  of  Taxation 

on  the  assumption  that  the  tax  will  bring  about  a  change  in 
the  demand  for  particular  houses,  the  burden  will  not  fall 
(except  in  most  unusual  cases)  on  the  landowner. 

In  the  second  place,  the  assumption  that  a  tax  on  house 
rents  will  bring  about  a  decided  change  in  the  demand  for 
house  accommodation  must  be  received  with  some  caution. 
When  it  is  stated,  for  instance,  that  "the  economist  has  not 
to  construct  a  special  law  of  taxation  for  the  taxing  of  houses, 
any  more  than  the  physicist  has  to  construct  a  special  law  of 
gravitation  for  the  tumbling  of  houses,"^ it  is  forgotten  that  a 
house,  if  its  foundations  are  rotten,  will  fall  to  the  ground 
more  quickly  than  a  balloon  or  a  feather,  and  that  what  in- 
terests us  here  is  precisely  the  ascertainment  of  the  force  and 
the  velocity  with  which  the  law  of  gravitation  acts. 

Most  writers  who  have  spoken  of  houses  have  put  them  in 
the  category  of  ordinary  commodities  of  complete  elasticity, 
where  a  change  in  price  immediately  brings  about  a  propor- 
tional change  in  demand.  But  this  hypothesis,  upon  which  the 
validity  of  the  reasoning  in  the  preceding  paragraph  depends, 
is  of  questionable  accuracy.  In  a  previous  chapter  it  was 
pointed  out  that  in  the  case  of  absolute  necessaries,  as  well  as 
in  that  of  expensive  luxuries,  great  alteration  of  price  goes 
hand  in  hand  with  slight  variation  of  demand.^  House 
accommodation,  now,  is  in  part  an  absolute  necessary,  in  part 
an  expensive  luxury.  For  many  classes  of  the  population, 
especially  in  the  congested  areas,  it  is  essential  for  the  tenants 
to  be  near  their  work.     For  one  reason  or  another,  they  prefer 

ing  passage,  which  has  reference  to  the  differential  rates  discussed  below  on  p.  318, 
but  which  is  equally  applicable  to  this  discussion :  "  The  imposition  of  a  uniform 
rate  .  .  .  would  in  all  probability  not  materially  affect  the  sum  total  of  ground 
rent.  .  .  .  The  demand  surface  with  which  we  have  to  deal  may  be  .  .  .  likened 
to  a  sort  of  air  cushion  of  which  some  parts  are  originally  more  elevated  than  others; 
but  when  you  press  down  some,  others  go  up,  and,  accordingly,  the  total  depres- 
sion is  not  to  be  expressed  by  any  simple  formula."  —  Economic  Journal,  y., 
pp.  341-342.  So  Professor  Marshall  points  out  "that  specially  onerous  rates 
in  one  district  are  a  bounty  to  ground  landlords  in  others."  — Principles  of  Eco- 
nomics, 5th  ed.,  p.  798, 

1  Edge  worth,  in  Economic  Journal,  x,  p.  183. 

^  Above,  p.  229. 


Taxes  on   Urban  Real  Estate 

to  remain  where  they  are.  As  in  the  case  of  all  necessaries, 
the  effect  of  a  tax  will  be  to  cause  them  to  forego  other  things 
rather  than  change  their  residence.  Practically,  it  means  that 
they  will  raise  money  to  pay  the  increased  rent  by  such  expe- 
dients as  taking  in  lodgers  —  that  is,  by  foregoing  some  of 
the  comforts  that  they  have  hitherto  enjoyed.  In  New  York 
city,  for  example,  the  sudden  rise  of  rents  in  the  tenement 
house  districts  in  1907-8  (which  was  indeed  only  in  part  due 
to  the  increase  of  taxation)  led  to  a  short  and  fruitless  so- 
called  rent-strike  on  the  part  of  the  tenants,  who  endeavored 
in  vain  to  resist  payment  of  the  increase ;  but  it  did  not  lead 
to  any  exodus  of  the  occupiers.  It  would  in  fact  require 
a  more  than  ordinary  discrepancy  between  the  rents  and 
proffered  accommodations  in  the  congested  areas  as  compared 
with  those  in  the  suburbs  to  bring  about  a  shifting  of  the 
population.  In  other  quarters  of  the  city,  on  the  other  hand, 
comfortable  houses  may  be  put  in  the  category  of  luxuries. 
It  is  a  familiar  fact  that  many  people  prefer  to  maintain  their 
supposed  station  in  life  at  almost  any  cost.  In  such  cases  a 
tax  on  house  accommodation  tends,  as  in  the  case  of  all  taxes 
on  luxuries,  to  make  them  forego  other  things  which  they 
deem  less  desirable.^ 

'The  foregoing  argument  has  been  accepted  and  reenforced  by  Mr.  G.  M. 
Blunden  in  Local  Taxation  and  Finance,  1895,  P-  5'>  ^^^  Memoranda,  p.  190. 
"  In  estimating  the  proportion  of  occupiers  who  would  remove  to  inferior  houses 
if  the  rates  were  substantially  increased,  we  may  safely  eliminate  the  majority  of 
those  who  are  able  to  save  any  considerable  portion  of  their  income,  the  diminu- 
tion of  the  rate  or  scale  of  future  earnings  being  a  smaller  evil  than  the  loss  of 
comfort  or  convenience  which  would  result  from  the  alternative  course.  We 
may  also  exclude  those  whose  means  enable  them  to  enjoy  luxuries  which  they 
value  less  than  the  luxury  of  a  good  house  ;  and  who,  having  no  luxuries  to 
surrender,  yet  prefer  to  give  up  some  other  necessary  or  decency  of  life  in  order 
to  retain  the  use  of  a  house  of  the  class  to  which  they  have  become  accustomed. 
The  surrender  of  some  portion  of  their  house  accommodation  is,  for  many  reasons, 
repugnant  to  the  feeling  of  the  great  majority  of  householders,  and  needs  only  be 
resorted  to  under  the  strongest  pressure  and  in  a  small  proportion  of  case*. 
Apart  from  the  loss  of  accommodations  and  amenities  involved,  the  trouble  and 
expense  of  removal  are  not  to  be  overlooked.  Hut  a  stdl  more  powerful  deterrent 
exists  in  the  feeling  that  removal  to  an  inferior  house  is  a  proclamation  of  poverty 
to  the  world.     Whatever  we  may  think  of  the  sentiment,  there  can  be  no  doubt 


314  Shifting  and  Incidence  of  Taxation 

In  general,  then,  it  may  be  afifirmed  that  the  demand  for 
house  accommodation  is  far  less  elastic  than  is  commonly 
supposed.  The  less  elastic  the  demand,  however,  the  more 
insignificant  obviously  will  be  the  proportion  of  the  tax  which 
the  occupier  will  be  able  to  shift  to  his  landlord.  A  tax,  then, 
which  will  bring  about  such  a  displacement  as  materially  to 
affect  the  demand  for  house  accommodation  must  be  an  ex- 
traordinarily   high    one.     Under   normal   conditions   it   may 

that  it  is  widely  prevalent,  and  would  cause  a  retrenchment  upon  privately  con- 
sumed necessaries,  such  as  food  and  fuel,  to  be  preferred  in  many  cases  where 
there  are  neither  luxuries  nor  savings  to  surrender."  In  a  private  letter  quoted  in 
Econo/nic  Journal,  x,  p.  188,  he  adds:  "  It  is  due  to  my  daily  observation  of  the 
facts  (and  not  to  any  preconceived  theory)  that  I  hold  the  opinion  that  there  is  in 
actual  life  a  much  greater  rigidity  in  the  demand  than  has  very  usually  been 
assumed.  .  .  .  As  a  result  of  my  experience,  I  have  become  convinced  that  the 
effects  of  high  or  rising  rates  in  lowering  the  standard  of  house  accommodation  is 
ordinarily  inappreciable." 

Professor  Edgeworth  originally  conceded  the  truth  of  the  contention  in  the 
case  of  dwelling  houses  of  the  laboring  classes  (^Economic  Journal,  vii,  1897,  P-  S^). 
although  he  failed  to  notice  that  it  is  almost  equally  true  of  houses  considered 
as  luxuries  rather  than  as  necessaries.  In  the  same  article,  in  fact  (p.  64),  he 
goes  so  far  as  to  grant  the  possibility  of  the  demand  in  general  being  "  perfectly 
inelastic  "  for  short  periods,  and  even  for  long  periods.  Later  on,  however,  in  the 
Economic  Journal,  x  (1900),  p.  (i8),  he  ignores  these  earlier  concessions  and 
accepts  Professor  Marshall's  statement  (^Principles  of  Economics,  book  iii,  chap, 
iv,  5th  ed.,  1907,  p.  107),  that  there  seems  to  be  an  elastic  demand  for  house 
room,  on  account  both  of  the  real  conveniences  and  the  social  distinction  which 
it  affords. 

In  1902,  Professor  Einaudi  made  an  exhaustive  investigation  of  this  point  in  a 
special  section  of  his  general  inquiry  i^Studi  sugli  Effetti  delle  Imposte,  pp.  30-71). 
After  declaring  that  my  contention  contains  "a  great  part  of  truth  "  {gran  parte 
di  vera,  p.  39),  he  concludes  that  the  demand  curve  for  house  accommodation, 
especially  in  the  case  of  dwellings,  is  rigid  at  first  and  particularly  so  in  the  lower 
grades,  and  that  it  becomes  less  rigid  as  the  scale  of  living  ascends  (p.  52). 
While  I  do  not  quite  share  his  opinion  as  to  the  conditions  at  the  upper  end  of 
the  scale,  I  regard  his  investigation  as  in  the  main  confirmatory  of  my  position, 
inasmuch  as  the  great  mass  of  house  rents  for  dwelling  purposes  are  to  be  found 
in  the  lower  grades.  Later  on,  in  fact,  Einaudi  speaks  of  such  a  rigid  demand  as 
being  quite  frequent  {abbastanza  frequente,  p.  164).  The  contention  is  also 
accepted  by  Row-Fogo,  An  Essay  on  the  Reform  of  Local  Taxation  in  England, 
pp.  146-147.  Cf  the  references  to  what  he  calls  the  "grotesque  rent-fund 
theory"  of  Mr.  Cannan  on  p.  142.  So  also  Mr.  L.  Price  says:  "  His  [the  ten- 
ant's] house  accommodation  is  within  narrow  limits  of  increase  or  decrease  of 
requirements  a  fixed  item  in  his  standard  of  comfort.  —  Memoranda,  p.  180. 


Taxes  on   Urban  Real  Estate 


315 


safely  be  affirmed  that  the  relative  rigidity  of  demand  for 
house  accommodation  is  apt  to  frustrate  the  action  of  the 
assumed  law  of  shifting  of  the  tax  from  tenant  to  landowner. 
The  third  point  referred  to  above ^  as  calculated  still  further 
to  impede  the  process  of  shifting  to  the  landowner  is  the 
existence  of  economic  friction.  Just  as  we  have  objected 
to  the  older  theory  of  the  shifting  of  the  land  tax  to  the 
consumer,  because  of  the  untenable  assumptions  of  perfect 
mobility  of  capital  and  territorial  isolation,  so  the  same 
objection  may  be  made  to  the  theory  of  the  necessary 
shifting  of  the  local  rates  from  occupier  to  landlord,  and 
largely  because  of  similar  untenable  assumptions.  As  has 
been  well  said,  economic  rent  is  "  the  rent  which  an  intelli- 
gent tenant  who  had  an  alternative  investment  for  his  capital 
and  mobility,  and  acquainted  with  the  market  and  his  own 
industry,  would  offer  to  pay."^  But  the  rent  actually  paid 
often  differs  from  pure  economic  rent.  John  Stuart  Mill 
has  pointed  out  that  in  Ireland  agricultural  rents  are  often 
persistently  above  the  economic  rent,  mainly  because  of  the 
lack  of  opportunity  and  the  lack  of  mobility  on  the  part  of  the 
tenant.  In  the  same  way  the  tenants  in  the  slums  of  large 
cities  have  practically  little  mobility.  They  must  live  in  the 
neighborhood  of  their  work,  they  shrink  from  the  expense  in 
moving  from  apartment  to  apartment,  and  their  choice  is 
limited  in  a  hundred  ways.  Here,  as  in  so  many  other  cases, 
the  tendency  of  the  tax  is  to  stay  where  it  is  first  imposed.^ 

^  Supra,  p.  310. 

2  Sidney  Webb,  in  Select  Committee  on  Town  Holdings,  1890,  Evidence,  qu.  51. 

'  As  Sir  T.  H.  Farrar  says:  "  Whatever  be  the  theory  on  these  matters,  a  tax 
is  very  apt  to  stick  where  it  first  falls."  — Select  Committee,  etc.,  Kvidcncc,  qu.  I24<>, 
and  Memoranda,  p.  66.  Cf.  Thorold  Rogers:  "  It  is  by  no  means  the  case  that 
a  person  who  has  a  tax  imposed  upon  him  can  always  impose  the  whole  of  that 
tax  upon  his  neighbor."  —  Ibid.,  qu.  2721.  The  practical  influence  of  friction  is 
well  brought  out  by  Mr.  L.  L.  Price  in  Memoranda,  p.  181.  It  is  to  be  depK>rcd 
that  Mr.  Price  should  be  so  inexact  in  his  nomenclature,  as  when  he  speaks 
(p.  179)  of  "shifting  the  incidence"  of  a  tax.  The  same  unfortunate  phra.sc  is 
used  by  several  other  writers,  like  Lord  I'arrar  (p.  67)  and  even  .Sir  K.  W. 
Hamilton  (p.  38).      Cf.  the  warning  in  the  Introduction,  supra,  p.  2. 

Some  of  the  qualifications  of  the  old  doctrine  are  well  put  by  Clifl^e-l.eslic  in 


3i6  Shifting  and  Incidence  of  Taxation 

Summing  up  all  these  considerations,  it  appears  that  the 
tendency  for  a  tax  imposed  on  the  occupier  to  be  shifted  even 
in  part  to  the  landowner  is  so  considerably  counteracted  by 
opposing  forces  that  we  are  safe  in  claiming  that  the  portion 
which  is  actually  shifted  to  the  landowner  is  so  insignificant 
as  to  warrant  no  serious  consideration.  A  tax  upon  house 
rent,  especially  when  assessed  upon  the  occupier,  is  therefore 
borne  to  an  overwhelming  extent  by  the  occupier;  and  only 
in  more  or  less  unusual  cases  is  it  shifted  by  him,  even  in 
part,  to  the  owner  of  the  house  or  land.  The  exceptional 
conditions  are  to  be  found  in  outlying  or  suburban  districts, 
in  decaying  quarters,  and  in  cases  of  extraordinarily  high 
taxes.  What  in  the  older  theory  was  considered  the  rule 
thus  turns  out  rather  to  be  the  exception.  In  the  long  run 
the  occupier  tends  to  bear  the  tax,  except  in  those  quarters  or 
under  those  conditions  where  the  demand  suffers  a  consider- 


the  following  passage  :  "  The  doctrine  by  which  eminent  economists  of  our  own 
day  affect  to  determine  the  incidence  of  rates  assumes  .  .  .  that  capitalists  not 
only  know  the  past  and  present  profits  of  all  occupations  and  investments, 
but  foreknow  them  at  remote  periods  —  to  the  end  of  a  long  building  lease,  for 
example.  Yet  it  is  clearly  impossible  for  persons  contemplating  the  building  or 
buying  of  new  houses  to  foretell,  even  for  twenty  years,  the  profits  that  a  single 
investment  will  yield.  The  movements  of  business  and  population,  the  demand 
for  houses  and  other  buildings,  the  increase  of  wealth  and  money,  and  the  general 
range  of  incomes  and  prices,  the  supply  of  new  houses  on  the  spot,  the  means  of 
locomotion  bringing  other  districts  within  reach,  all  defy  calculation.  .  .  .  The 
truth  is  that  the  profits  of  house  property,  the  rents  that  can  be  exacted  from 
occupiers,  and  the  incidence  of  rates,  depend  on  no  such  fiction  as  the  '  average 
rate  of  profit,'  but  on  the  demand  for  and  the  supply  of  houses,  and  these  condi- 
tions vary  from  time  to  time,  and  from  place  to  place.  .  .  .  The  constant 
increase  of  population,  the  narrow  limits  of  distance  from  their  business  within 
which  it  is  convenient  to  most  people  to  live,  and  the  cost  and  trouble  to  existing 
occupiers  of  removal,  give  the  owner,  in  most  cases,  the  stronger  position,  and 
enable  him  to  throw  any  increase  in  the  rates  on  the  occupier.  .  .  .  The  occupier 
of  the  house  pays  all  the  rent  that  can  be  screwed  out  of  him.  A  little  more 
could  be  screwed  out  of  him  were  there  no  rates,  and  to  that  extent  the  rates 
may  be  said  to  fall  on  the  owner,  the  remainder  being  borne  by  the  workmen." — 
"The  Incidence  of  Imperial  and  Local  Taxation  on  Working  Classes,"  in  Essays  in 
Political  and  Moral  Philosophy.  London,  1879,  pp.  207-209.  In  the  2d  ed., 
under  the  title  Essays  on  Political  Economy ,  London,  1888,  this  passage  may  be 
found  on  pp.  399-401. 


Taxes  on   Urban  Real  Estate  317 

able  check,  or  where  we   are  confronted  by  an  absence  of 
competitive  conditions. 

The  above  discussion  has  dealt  with  the  cases  which  occur 
in  actual  life.  Some  writers  who  love  to  turn  economics  into 
a  playground  for  logical  exercises  discuss  various  hypothetical 
solutions  which  never  happen,  and  which  may  therefore  be 
relegated  to  a  note.^ 

The  discussion  of  the  incidence  of  local  rates  in  England 
has  been  much  beclouded  by  two  considerations,  one  of 
actual  fact,  the  other  of  questionable  theory.  The  fact  is 
the  existence  of  differential  rates ;  the  theory  is  the  alleged 
distinction  between  "  onerous  "  and  "beneficial  "  rates. 

Let  us  consider  first  the  fact  of  differential  rates.  Local 
taxes  in  England,  instead  of  being  uniform  throughout  the 

^  Thus  Professor  Edgeworth  discusses  the  possible  results  of  a  tax  (i)  where 
there  is  no  competition  at  all  between  houses  in  different  parts  of  the  city 
(^Economic  Journal,  vii,  p.  62)  ;  (2)  "where  only  one  'dose,'  so  to  speak,  of 
building  capital  can  be  applied  to  one  parcel  of  land,"  i.e.  where  "  only  a  single- 
storied  dwelling  of  uniform  pattern  can  be  placed  on  each  unit  of  the  area  availa- 
ble for  building  "  (^IhiJ.,  p.  64);  (3)  where  the  investments  open  as  an  alternative 
to  an  intending  builder  "  are  not  indefinitely  extensive  in  comparison  with  the 
housebuilding  industry  "  (^Ibid.,  p.  68).  In  the  first  of  these  practically  impossible 
cases  the  tax  will  obviously  rest  on  the  landowner;  in  the  third, on  the  house  owner. 

Professor  Einaudi,  however,  far  surpasses  Professor  Edgeworth  in  his  discussion 
of  purely  supposititious  cases.  He  takes  the  letters  from  A  to  M  (omitting  J  and 
K),  each  representing  a  certain  condition  of  the  case,  and  he  then  proceeds  to 
vary  each  condition  in  turn.  {Studi  sugli  Effetti  Jdle  Iinposte,  pp.  156  el  seif.) 
Had  he  the  courage  of  his  convictions,  there  would  thus  be  not  less  than  eleven 
times  eleven,  or  one  hundred  and  twenty-one,  separate  variations.  This  was 
evidently  a  little  too  much,  and  some  of  the  hypotheses  were  omitted  presumably 
because  the  practical  impossibility  was  too  obvious.  Among  the  impossible  cases 
discussed  may  be  mentioned,  in  addition  to  those  found  in  Edgeworth,  the  fol- 
lowing :  I.  Where  a  tax  is  imposed  only  on  dwellings  which  cannot  be  converted 
into  houses  used  for  other  purposes  (p.  166).  2.  Where  there  is  a  comjilete 
monopoly  on  the  part  of  the  landlord  (pp.  167  and  186),  a  situation  of  which 
Einaudi  himself  says  that  it  is  "an  extreme  case  which  scarcely  ever  happens" 
{caso  estremo  die  quasi  mai  si  verifica).  3.  Where  the  houses  are  not  substitutes 
for  each  other,  and  where  the  tax  exceeds  the  net  rent  (p.  178).  We  shall  not 
stop  to  deal  with  his  solutions  of  these  cases.  As  a  training  in  mathematics  or 
logic  the  discussions  of  Professors  Edgeworth  and  Einaudi  are,  no  doubt,  exceed- 
ingly valuable  ;  but  as  contributions  to  an  economics  which  is  to  be  of  any  use 
in  this  world,  their  value  is  not  in  all  respects  quite  so  apparent. 


3i8  Shifting  and  Incidence  of  Taxation 

country,  as  is  the  inhabited  house  duty,  vary  from  locality 
to  locality.  This  system  of  local  variation  was  the  original 
one  everywhere,  but  has  in  some  countries  given  way  to 
a  uniform  tax.  For  instance,  in  Belgium,  since  a  long 
period,  and  in  France  since  a  quarter  of  a  century,  the  tax 
on  houses  has  become  a  percentage  tax  uniform  throughout 
the  country ;  whereas  in  England  the  tax  is  still  apportioned, 
as  in  America,  and  varies  from  place  to  place.  The  whole 
of  the  preceding  discussion  has  proceeded  on  the  assumption 
that  the  rate  of  the  tax  is  uniform  on  all  the  houses  con- 
cerned. To  the  extent  that  the  rates  vary  in  different  parts 
of  the  same  town,  it  might  seem  that  the  excess  in  any  par- 
ticular case  tends  to  fall  ultimately  on  the  owner,  not  on  the 
occupier.  If  a  prospective  tenant,  on  whom  taxes  are  levied 
in  first  instance,  has  the  choice  of  two  houses  of  equal  de- 
sirability but  in  different  parts  of  the  town,  the  amount  of 
the  tax  being  in  one  case  ten  dollars  more  than  in  the  other, 
he  will  obviously  choose  the  latter  house,  or  compel  the  owner 
of  the  former  to  forego  ten  dollars  of  the  rent.  In  England 
the  districts  within  which  the  rate  of  the  tax  is  uniform  are 
much  smaller  than  in  America.  It  frequently  happens  that 
different  parts  of  the  same  city,  or  even  opposite  sides  of  the 
same  street,  pay  different  rates,  because  located  in  different 
parishes.  In  such  cases  it  is  fair  to  make  a  distinction  be- 
tween the  constant  and  the  variable  or  differential  part  of  the 
rate,  the  latter  representing  the  excess  above  the  rate  that  is 
uniform  in  all  the  districts.  Only  the  constant  part  of  the 
rate  would  then  fall  on  the  occupier ;  the  remainder  being 
presumed  to  be  borne  by  the  building  owner,  and  under 
favorable  conditions  being  shifted  by  him  to  the  landowner. 
This  variable  element  of  the  building  tax,  however,  will  in 
general  be  very  insignificant  in  amount,  for  the  reason  that, 
even  in  England,  the  normal  differences  in  the  rates  in  city 
districts  which  usually  have  similar  expenses  are  apt  to  be 
exceedingly   slight.^      Moreover,    the    preceding    argument 

^  The  contention  of  Sargant,  Urban  Rating,  1890,  p.  49,  that  the  differential 
rate  amounts  to  two-thirds  or  even  three-quarters  of  the  total  tax,  seems  to  in- 


Taxes  on  Urban  Real  Estate  319 

ignores  the  fact  that  if  the  prospective  tenant  is  induced  by 
the  tax  to  refrain  from  renting  the  house  in  the  highly  taxed 
district,  thus  reducing  the  demand,  he  will  rent  a  house  in 
the  undertaxed  district,  thereby  increasing  the  demand.  The 
total  demand  for  houses  may  thus  not  be  appreciably  affected, 
and  the  landowners,  as  a  class,  may  hence  not  suffer.^  On 
the  whole,  then,  it  may  be  said  that  even  in  the  case  of  a 
differential  rate,  the  tax  on  house  rentals  will  fall  almost 
entirely  on  the  occupier.- 

volve  an  error.  He  terms  "  constant "  rate  only  that  part  of  the  tax  which  is 
uniform  throughout  the  kingdom.  This  is  arbitrary.  In  speaking  of  a  differ- 
ential rate  we  must  always  compare  two  houses  of  equal  desirability  or  in  the 
same  neighborhood  ;  for  it  is  manifestly  impossible  to  say  how  much  of  the 
differential  rate  falls  on  the  structure,  and  how  much  on  the  plot.  We  must  not 
compare  a  house  in  London  with  a  house  in  a  country  parish,  because  there  is  no 
competition  between  them.  The  rule  holds  good  only  within  the  narrow  range 
of  houses  subject  to  the  same  competition.  Sargant's  views  are  repeated  with 
emphasis  in  Afemoranda,  p.  213.  As  Edgeworth  sarcastically  remarks  in  /'Ico- 
nomic  Journal,  x,  p.  343,  note,  "as  to  the  extent  of  the  reduction,  Mr.  Sargant's 
authority  cannot  be  claimed."  Cf.  also,  J.  D.  Chorlton,  The  Rating  of  l.anJ 
Values,  1907,  p.  21,  who  says:  "More  importance  is  attached  to  this  qualifica- 
tion than  it  appears  to  me  to  deserve." 

1  Cf.  Marshall,  in  Memoranda,  p.  1 19 :  "  It  is  true  that  an  equalization  of  rates 
would  raise  the  aggregate  of  site  values  if  it  removed  rates  from  the  best  sites 
and  increased  rates  on  the  inferior  sites.  But  the  e<iuali/.ation  is  at  least  as  likely 
to  transfer  part  of  the  burden  of  rates  from  the  inferior  sites  to  the  better  sites, 
and  if  it  did  that,  it  would  lessen  the  aggregate  of  site  rents."  —  Kdgeworth,  in 
the  Economic  Journal,  x,  pp.  342-343,  in  quoting  the  statements  of  several 
contributors  to  the  Memoranda  who  think  that  the  differential  rates  tend  to  be 
shifted  to  the  landowners,  judiciously  observes  that  these  writers  express  them- 
selves "with  less  (jualification  than  might  perhaps  be  recommended." 

2  Fawcett's  discussion  of  this  question  is  unsatisfactory.  He  makes  a  distinc- 
tion between  buildings  in  general  and  those  possessing  exceptional  advantages 
of  situation.  In  the  former  case,  rates,  he  says,  are  a  charge  on  the  occupier; 
in  the  latter,  on  the  ground  owner.  "  For  if  rates  were  remitted,  the  saving  re- 
sulting would  simply  represent  so  much  added  to  the  ground  rent,  since  rent  is 
fixed  by  the  demand,  and  the  demand  would  not  be  altered  if  rates  were  remitted." 
Fawcett's  argument  can  be  turned  against  him.  It  may  e<|ually  well  be  sai<l  that 
given  a  certain  demand  before  rates  were  imposed,  the  levy  of  new  rates  would 
not  change  the  rent  because  it  would  not  change  the  demand.  Hence  the  rates 
would  fall  on  the  occupier  who  pays  them,  and  not  on  the  ground  owner,  whose 
rent  is  unchanged.  In  fact,  Fawcett's  whole  distinction  l>ctween  these  cl.issc<i  of 
houses  is  untenable.     Every  house  possesses  "  certain  advantages  or  disadvan- 


320  Shifting  and  Incidence  of  Taxation 

We  come  then  to  the  second  consideration  mentioned  on 
page  317,  the  alleged  distinction  between  onerous  and  benefi- 
cial rates. 

It  so  happens  that  in  England,  instead  of  there  being 
a  single  tax  on  house  rents,  as  is  commonly  the  case  else- 
where, the  tax  is  divided  into  a  multiplicity  of  charges,  such 
as  the  poor-rate,  the  sewers-rate,  the  water-rate,  the  lighting 
and  watching  rate,  the  sanitary  rate,  etc.  This  has  induced 
some  writers  to  maintain  that  in  certain  cases  the  taxes  are 
nothing  but  charges  levied  in  return  for  the  advantages 
accruing  to  the  tax  payer,  and  that  such  charges,  which  are 
levied  in  proportion  to  special  benefit  received,  ought  to  be 
called  beneficial  rates,  as  opposed  to  the  taxes  which,  because 
of  the  impracticability  of  ascertaining  any  separably  measur- 
able benefit  to  the  individual,  should  be  called  onerous.  The 
onerous  rates  are  burdensome;  the  beneficial  rates  are  not 
burdensome  because  the  burden  is  compensated  by  the 
advantage.  The  onerous  rates  are  assessed  in  accordance 
with  the  principle  of  ability  to  pay ;  the  beneficial  rates  in 
accordance  with  the  principle  of  benefit.^ 

As  a  matter  of  fact,  however,  there  are  virtually  no  such 
beneficial  rates.  As  has  been  pointed  out  in  another  place,^ 
the  utmost  that  can  be  claimed  for  some  of  the  so-called 
beneficial  rates  is  that  the  benefit  is  supposed  to  accrue  to  all 
the  rate  payers  living  in  a  certain  area.  Even  in  such  cases, 
however,  the  law  specifically  forbids  the  application  of  the 
principle  of  benefit  to  the  individual  rate  payer.^     The  whole 

tages  of  situation,"  The  advantages  merge  into  each  other  by  imperceptible 
gradations.  Cf.  his  Manual  of  Political  Economy,  6th  ed.,  1883,  p.  618.  On 
the  other  hand,  the  commonly  accepted  doctrine  of  Ricardo  and  Mill  fails  to 
make  either  of  the  distinctions  that  have  been  pointed  out  in  the  text,  for  it  states 
that  the  ground  tax  falls  on  the  owner,  and  the  house  tax  on  the  occupier,  —  each 
of  which  statements  is  partially  incorrect,  or,  at  all  events,  inexact. 

1  This  nomenclature  seems  to  be  due  to  Sir  G.  H.  Murray  in  "  Notes  on  the 
Growth  and  Incidence  of  Local  Taxation,"  Economic  Journal,  iii  (1893), 
p.  701,  and  has  been  widely  adopted,  especially  by  the  Royal  Commission  on 
Local  Taxation. 

2  Seligman,  Essays  in    Taxation,  9th  eiL,  1921,  pp.  439~443- 

'Take,  e.g.,  the  most  extreme  case — that  of  the   sewers-rate  (which,  be  it 


Taxes  07i  Urban  Real  Estate  321 

distinction  is  an  unhappy  one,  peculiar  to  the  English  writers 
and  due  to  the  absence  of  a  proper  analysis  of  taxes  as  com- 
pared with  fees  and  assessments.^ 

Even  if  there  were  any  beneficial  rates,  however,  it  would 
be  entirely  impracticable  to  separate  them  from  the  so-called 
onerous  rates.  This  is  recognized  by  the  best  authorities. 
Sir  Edward  Hamilton,  for  instance,  in  his  introductory  memo- 
randum to  the  Royal  Commission  on  Ta.xation,  tells  us  distinctly 
that  as  "  I  have  no  means  of  properly  distinguishing  '  bene- 
ficial '  from  *  onerous '  rates,  I  have  no  choice  but  to  treat  all 
rates  together. "^  And  Professor  Edgeworth,  after  a  careful  re- 
view of  the  problem,  concludes  that  "  altogether  the  distinctions 
between  onerous  and  beneficial  taxation  are  not  so  fundamen- 
tal as  to  be  the  grounds  of  essentially  different  regulations."^ 

Above  all,  however,  the  alleged  distinction  between  these 
two  classes  of  rates  does  not  in  the  least  help  the  case  of  those 
who  claim  that  an  appreciable  part  of  the  local  rates  is  shifted 
to  the  landowner.     On  the  contrary,  it  is  beyond  all  question 

remarked  in  passing,  has  nothing  in  common  with  city  sewers  in  the  modem 
sense,  but  which  is  more  properly  called  the  "  land  drainage  "  rate).  Here  it  is 
clearly  established  that  "it  is  not  lawful  to  rate  lands  differentially  according  to 
benefit."  Knight  v.  Langport  Drainage  Board  [1898],  Q.  B.  588;  quoted  in 
Rates  and  Taxes.  A  Practical  Guide.  By  E.  M.  Konstam,  1906,  p.  79.  In  the 
same  way  a  water-rate  may  be  levied  on  a  house  even  if  the  owner  or  occupier 
does  not  desire  any  water,  or  uses  none.  Public  Health  Act,  1875,  s.  62. 
Op.  cit ,  p.  70.  All  this  seems  to  be  overlooked  by  Cannan,  History  of  local 
Taxation,  p.  138,  when  he  affirms:  "  It  may  be  said  that  the  [existing]  system  is 
more  in  accordance  with  .  .  .  the  principle  ...  of  taxation  according  to  benefit, 
than  with  .  .  .  that  of  taxation  according  to  ability." 

1  See  the  chapter  on  the  "  Classification  of  Public  Revenues"  in  Scligman. 
Essays  in  Taxation.  Professor  Marshall  accepts  the  distinction  between 
onerous  and  non-onerous  rates,  but  prefers  the  term  "remunerative"  to  "bene- 
ficial." Memoranda,  p.  1 13;  Principles  of  Economics,  5th  ed.,  1907.  p.  718. 
Most  unfortunately,  however,  he  selects  as  his  example  of  a  tax  where  "  the 
owners  of  the  property  to  be  benefited  may  fitly  be  assessed  on  the  'joint-sttKk 
principle'  according  to  which  calls  are  made  from  shareholders  in  proportion 
to  the  stake  in  the  common  venture"  the  case  of  "an  arterial  system  of  li>cal 
drainage."  As  has  been  pointed  out  in  the  preceding  note,  this  is  precisely  what 
is  not  done.  If  it  were  done,  it  would  net  be  a  local  r.ite  at  all  (which  is  levied 
annually),  but  a  "  betterment  tax  "  or  special  assessment. 

"^Memoranda,  p.  37.  ^  Economic  Journal,  x,  pp.  182-183. 


32  2  Shifting  and  Incidence  of  Taxation 

that  if  a  rate  were  really  "beneficial,"  the  imposition  of  the 
tax  would  not  be  felt  as  a  burden,  would  hence  not  diminish 
the  demand  for  house  accommodation,  and  could  therefore  not 
be  shifted  to  the  owner.^  So  that,  if  there  were  any  such 
portion  of  the  aggregate  tax  on  house  rents  as  is  erroneously 
imagined  by  the  Enghsh  writers,  it  would  only  strengthen  the 
case  of  those  who  assert  that  the  amount  of  the  local  rates 
shifted  to  the  landowner  is  ordinarily  inappreciable. 

Finally,  it  must  not  be  overlooked  that,  strictly  speaking, 
the  term  incidence  should  not  be  applied  at  all  to  the  possible 
but  practically  negligible  small  residuum  of  burden  resting  on 
the  landowner.  This  ought  rather  to  be  classified  as  one  of 
the  wider  effects  of  taxation.  Even  if  the  tax  should  induce 
tenants  to  satisfy  themselves  with  poorer  houses,  thus  reducing 
the  demand  for  better  houses,  and  consequently  diminishing 
the  revenue  to  the  government,  the  tax  imposed  on  the  occu- 
pier will  nevertheless  fall  on  him.  A  small  aggregate  tax  on 
smaller  rent  is  just  as  bad  as  a  high  aggregate  tax  on  high 
rent.  Whatever  may  happen  to  the  landlord,  the  occupier 
cannot  escape  payment  of  his  tax ;  and  it  cannot  well  be  said 
that  any  portion  of  the  tax  is  shifted  to  the  owner  or  that  the 
incidence  of  the  tax  rests  on  him.^  The  mere  fact  that  cer- 
tain undesirable  wider  effects  of  the  tax  are  traceable  to  the 

1  This  is  conceded  by  Professor  Edgeworth,  who  says :  "  So  far  as  imposts  are 
beneficial,  the  demand  of  the  occupier  is  increased  to  the  full  extent  of  the 
impost,  and  accordingly  there  is  no  relaxation  in  the  demand  for  sites."  Eco- 
nomic Journal,  X,  p.  342. 

2  The  above  contention  is  accepted  by  Row-Fogo,  op.  cit.,  pp.  145-146  :  "  If 
rates  had  never  existed,  people  might  be  living  in  larger  houses,  and  more  land 
might  be  built  on.  In  this  alone  lies  any  importance  which  may  attach  to  the 
question:  Do  tenants  take  rates  into  account?  .  .  .  A  discussion  of  such  '  effects ' 
of  a  house  duty  on  landowners  is  not  really  pertinent  to  the  present  inquiry,  for 
we  only  wish  to  know  whether  landlords  pay  rates." —  Professor  Edgeworth  also 
virtually  concedes  this,  when  he  says :  "  What  the  Exchequer  loses  through  the 
diminished  use  of  houses  is  not,  in  general,  equal  to  what  the  ground  landlords 
lose  through  the  diminution  of  demand  for  sites.  Nor  would  the  equality  be  of 
any  fiscal  significance,  since  what  is  lost  by  the  ground  landlords  is  not  gained  by 
the  Exchequer.  Indeed,  the  question  has  been  raised  whether  an  effect  of  this 
sort  —  detrimental  to  a  certain  class,  without  any  corresponding  benefit  to  the 
Exchequer  —  can  properly  be  described  as  the  incidence  of  a  tax." — Memoranda, 


Taxes  on  Urban  Real  Estate  323 

landlord's  interest  does  not,  properly  speaking,  impugn  the 
accuracy  of  the  statement  that  the  tax  received  by  the  gov- 
ernment, whether  it  be  a  high  tax  on  high  rentals  or  a  low 
tax  on  low  rentals,  is  entirely  paid  and  borne  by  the  occupier. 
Even  regarding  the  problem,  however,  as  one  of  the  wider 
effects  of  taxation,  we  have  seen  that  there  is  little  reason  to 
claim  the  existence  of  any  appreciable  burden  on  the  land- 
lord. The  contrary  doctrine  which  is  still  found  in  some  of 
the  leading  writers  is  due  in  large  measure  to  their  inatten- 
tion to  the  highly  important  practical  consequences  of 
qualifications  which  they  themselves  make,  but  whose  signifi- 
cance they  underrate.^ 

pp.  131-132.  We  have  seen  above  the  reasons  for  thinking  that  Professor  Edge- 
worth  is  mistaken  in  the  amount  of  detriment  which  he  ascribes  to  the  landlord. 
'  Professor  Edgeworth's  concessions  have  been  mentioned  above.  Some  of 
them  are  again  summed  up  in  Memoranda,  p.  199.  Professor  Marshall  also 
makes  the  following  concessions  :  "  Those  rates  which  are  truly  onerous  are  less 
in  amount  and  vary  less  from  place  to  place  than  is  commonly  supposed"  (^Memo- 
randa, p.  118);  "When  rates  are  compounded,  friction  sometimes  sets  on  the 
side  of  the  tenant  {Ibid.,  p.  120);  the  occupier  bears  more  of  the  burden  [of  a 
new  tax]  than  he  would  if  part  of  the  rates  were  collected  from  the  owners" 
{Ibid.).  When  Professor  Marshall  states  his  broad  generalizations,  he  does  not, 
in  my  opinion,  make  sufficient  allowance  for  the  practical  effect  of  these  con- 
cessions. —  Perhaps  the  most  noteworthy  of  the  recent  writers  to  discuss  the  tax 
on  the  occupier  is  Mr.  G.  H.  Blunden,  in  an  article  on  "The  Incidence  of  Urban 
Rates,"  published  in  the  Economic  Review,  vol.  ii,  October,  1891.  Mr.  Blunden's 
conclusions  agree  in  the  main  with  those  expressed  in  the  text,  with  one  excep- 
tion. He  seeks  to  make  a  distinction  between  dwelling-houses  and  shops  or 
business  premises,  thinking  that  rates  on  shops  in  the  best  situation  fall  on  the 
ground  landlord  because  he  possesses  a  monopoly.  But  in  the  first  place  Mr. 
Blunden  really  makes  no  such  distinction,  because  he  tells  us  (p.  496)  that  rates 
on  ordinary  dwelling-houses  in  congested  areas  may  also  fall  on  the  ground 
owner,  while  in  less  desirable  localities  rates,  whether  on  dwelling-houses  or  on 
shops,  do  not  fall  on  the  ground  owner.  Mr.  Blunden's  distinction  is  therefore 
really  one  between  monopoly  and  competitive  sites,  not  between  shops  and 
dwellings.  But  even  this  distinction  of  Mr.  Blunden  is  untenable,  for  the  advan- 
tages of  sites  merge  into  each  other  by  imperceptible  gradations.  The  relative 
differences  in  eligibility  between  an  alleged  monopoly  site  and  a  less  liesirable 
site  nominally  subject  to  competition  are  not  altered  in  the  least  by  the  imposition 
or  the  remission  of  a  tax  which  affects  both  sites  proportionately.  In  his  book 
on  Local  Taxation  and  Finance,  London,  1895,  Mr.  Blunden  seems  to  modify 
his  distinction  between  dwelling-houses  and  shops.  See  pp.  55,  56.  Cf.  also  his 
later  exposition  in  Memoranda,  pp.  189-190  and  199. 


324  Ski/ting  and  hicidence  of  Taxation 

In  conclusion,  it  need  scarcely  be  pointed  out  that  the 
problem  is  not  completely  solved  by  the  statement  that  the 
incidence  of  the  tax  is  on  the  occupier.  For  this  may  be  only 
the  beginning  of  a  process,  as  a  result  of  which  the  broader 
effects  of  taxation  are  visible.  This  problem,  however,  has 
been  discussed  above  in  connection  with  a  tax  on  the  selling 
value  of  real  estate.^  The  conclusions  there  reached  are  also 
applicable  here. 

To  sum  up  this  whole  discussion,  it  may  be  said  that  when 
the  local  real  estate  or  house  tax  is  levied  according  to  the 
gross  rent  of  the  house  and  is  assessed  in  first  instance  on  the 
occupier,  the  house  owner  in  prosperous  and  progressive  com- 
munities will  not  suffer,  the  burden  will  rest  only  to  an  insig- 
nificant extent  on  the  landowner,  and  the  tax  will  fall  almost 
entirely  on  the  occupier  of  the  premises.  In  decaying  and 
unprosperous  districts,  indeed,  these  conclusions  may  be 
modified ;  but  in  all  cases  more  of  the  tax  will  tend  to  be 
borne  by  the  tenant  when  the  tax  is  originally  imposed  on 
him  than  when  the  tax  is  assessed  on  the  owner.^ 

1  Supra,  pp.  296-298. 

2  It  is  no  wonder,  then,  that  in  England  the  movement  for  a  tax  on  ground 
values,  assessed  on  the  owner,  should  now  be  making  such  rapid  headway.  For 
the  English  system,  with  its  exemption  of  the  landowner  from  special  assessments 
for  local  improvements,  and  with  its  casting  so  large  a  share  of  the  whole  burden 
on  the  occupier,  is  assuredly  open  to  criticism.  In  Scotland  and  Ireland  the 
rates  are  generally  divided  between  occupier  and  owner.  The  same  plan  was  at 
one  time  also  proposed  in  England,  but  the  solution  of  the  problem  there  will 
probably  be  found  in  another  direction. 

For  an  application  of  the  above  general  theories  to  American  conditions  see 
i}RG  Final  Report  of  the  Committee  on  Taxation  of  the  City  of  A^ru)  York,  1916 
(398  pp.)  and  especially  the  supplementary  volume  Some  Probable  Effects  of 
Vie  Exemption  of  Improvements  from  Taxation  in  the  City  of  New  York.  A 
Report  prepared  for  the  Committee  on  Taxation  of  the  City  of  New  York.  By 
Robert  Murray  Ilaig.  N.  Y.,  1915,  esp.  pp.  124  et  seq.  Cf.  also  the  same  author's 
The  Exemption  of  Improvements  from  Taxation  in  Canada  and  the  United 
States.  A  Report  prepared  for  the  Committee  on  Taxation  of  the  City  of  New 
York.     1915  (291  pp.). 


CHAPTER    IV 

Incidence  of  Taxes  on  Personal   Property,  on  Capital 
AND  Interest 

What  is  called  personal  property  in  English-speaking  coun- 
tries includes  not  only  capital  in  the  economic  sense,  but  con- 
sumable commodities  not  used  in  production,  like  books  and 
pictures,  and  wealth  of  other  kinds,  like  money.  Taxes  may 
be  imposed  either  on  property  itself  or  on  the  revenue  derived 
from  property.  Since  all  taxes  are  nominally  paid  out  of 
revenue,  it  is  thus  immaterial,  so  far  as  the  question  of  inci- 
dence is  concerned,  whether  we  speak  of  taxes  on  capital  or 
of  those  on  interest  and  profits.  It  has  been  laid  down  as  a 
general  proposition  by  a  recent  writer  that  "  the  taxation  of 
property  is  the  taxation  of  the  property  owner."  ^  The  mat- 
ter, however,  is  by  no  means  so  simple  as  is  assumed. 

So  far  as  a  tax  is  laid  on  personal  property  which  is  not 
capital  it  cannot  be  shifted.  For  instance,  if  a  tax  is  imposed 
on  the  permanent  owner  of  luxuries,  like  pictures  or  jewels, 
he,  and  he  alone,  bears  the  burden.  Of  this  nature  are  what 
are  known  in  England  as  the  assessed  taxes  and  in  the  con- 
tinental countries  as  sumptuary  taxes.  Whatever  is  held 
simply  for  enjoyment  and  not  for  sale,  provided  it  is  not  used 
for  productive  or  lucrative  purposes,  is  not  capital.  A  tax  on 
such  property  cannot  be  shifted,  because  the  property  is  not 
sold,  and  because  it  produces  nothing  which  can  be  sold. 
Here,  indeed,  the  taxation  of  property  is  the  taxation  of  the 
property  owner.     On  the  other  hand,  the  incidence  of  a  tax 

1  "The  Single  Tax."  By  Charles  B.  Spahr.  In  Political  Science  Quarterly, 
vi,  p.  633.  Cf.  the  same  author's  An  Essay  on  the  Present  Distribution  of  Wealth 
in  the  United  States.     New  York,  n.d.  (1896),  p.  154,  note. 

325 


o 


26  Shifting  and  Incidence  of  Taxation 


on  capital  or  on  profits  and  interest  is  somewhat  more  com- 
plicated. We  may  conveniently  discuss  the  subject  under 
three   heads: — 

A.  A  uniform  tax  on  all  capital  or  interest. 

B.  An  unequal  tax  on  all  capital,  or  a  uniform  tax  on  only 
some  forms  of  capital  or  interest. 

C.  A  tax  on  profits. 

It  is  with  this  last  division  only  that  the  English  economists 
have  hitherto  concerned  themselves. 

A.    A    Unifonn   Tax  on  all  Capital 

Let  us  frankly  state,  at  the  outset,  that  this  is  only  a 
hypothetical  case.  It  is  the  theory  of  the  American  property 
tax ;  but  it  is  not  the  practice,  and  it  can  never  be  the  prac- 
tice.    Why  not .-' 

A  tax  on  capital  can  be  unequal  in  two  ways.  There  may 
be  inequality  in  the  rate,  or  there  may  be  inequality  in  the 
taxable  capital.  In  other  words,  the  tax  may  be  assessed  on 
all  capital,  but  in  different  proportions ;  or  it  may  be  assessed 
on  only  some  forms  of  capital.  Now  a  universal  tax  on  all 
capital  is  an  impossibility  in  the  modern  world.  It  might  be 
possible  in  a  completely  isolated  community,  where  all  the 
inhabitants  employed  their  entire  capital  within  the  narrow 
limits  of  the  community ;  but  in  actual  life  it  does  not  exist. 
Not  only  does  the  tax  differ  from  commonwealth  to  com- 
monwealth, but  the  field  within  which  capital  is  employed 
is  as  wide  as  the  world  ;  while  the  eflficacy  of  any  tax  law 
is  restricted  to  a  particular  state  or  locality.  In  other  words, 
the  international  employment  of  capital  renders  a  tax  on  all 
capital  an  impossibility.  Only  on  the  assumption  that  every 
state  in  the  whole  world  taxed  all  forms  of  capital  alike  could 
we  have  such  a  universal  tax.     But  this  is  most  improbable. 

Secondly,  even  granting  that  there  was  such  a  universal 
tax,  it  would  still  be  unequal  within  the  limits  of  any  particu- 
lar state ;  for,  even  if  the  state  attempted  to  tax  all  forms  of 
capital  at  the  same  rate,  it  could  never  succeed.     Not  only 


Incidence  of  Taxes  on   Capital  327 

would  there  always  be  some  forms  of  capital  within  the  state 
which,  as  all  experience  has  shown,  would  completely  evade 
taxation,  but  the  same  legal  rate  on  various  kinds  of  capital 
would  inevitably  be  a  different  actual  rate.  This  is  evident 
when  we  consider  the  rate  of  interest.  The  rate  of  interest 
varies  with  different  kinds  of  capital,  according  to  the  security 
of  the  investment,  the  length  of  the  loan,  the  state  of  the 
money  market  and  a  hundred  other  factors.  In  New  York 
state,  for  instance,  during  a  single  year  the  rate  of  interest 
has  varied  from  two  and  a  half  per  cent  on  certain  prime 
bonds  to  a  few  hundred  per  cent  on  loanable  capital  in  Wall 
Street.  A  uniform  rate  of  tax  on  capital  would  thus  result  in 
very  divergent  actual  rates  on  the  interest  or  earnings  of  vari- 
ous forms  of  capital.  Hence,  from  whatever  point  of  view 
we  regard  it,  a  uniform  tax  on  all  capital  is  an  impossibility.^ 

Bearing  in  mind,  then,  that  a  uniform  tax  on  capital  is 
only  an  hypothesis,  let  us  endeavor  to  ascertain  its  incidence. 
The  question,  of  course,  can  affect  only  the  capitalist  and 
the  borrower.  As  between  them,  it  is  plain  that  a  uniform 
tax  on  all  capital  must  fall  on  the  lender,  that  is,  on  the 
capitalist.  There  would  be  no  way  for  him  to  shift  the 
burden.  As  it  is  not  to  be  assumed  that  he  would  consume 
his  capital  unproductively,  he  would  attempt  to  reimburse 
himself  for  the  tax  either  by  investing  the  capital  in  some 
business  or  by  lending  it  to  some  one  else.  If  he  invested  it 
in  a  business,  the  demand  for  loanable  capital  would  decrease 
as  much  as  the  supply,  for  he  would  simply  be  doing  what 
the  borrower  would  otherwise  have  done.  The  rate  of 
interest  would  thus  not  rise.  If  he  invested  it  in  fixed 
capital  or  land,  the  rate  of  interest  would  certainly  not  tend 
to  rise;  for  any  large  investment  in  fixed  capital  would  simply 
set  free  so  much  circulating  capital,  that  is,  the  purchase 
price  of  the  fixed  capital.  Under  either  supposition,  there- 
fore, the  tax  could  not  be  shifted. 

There  is,  however,  one  case  in  which  the  burden  of  the 

^  Pantaleoni,  Traslazione,  p.  245,  has  called  attentiun  to  this  fact.  His  whole 
discussion  on  this  point  is  very  noteworthy. 


328  Shifting  and  Incidence  of  Taxation 

tax  could  be  partially  overcome.  If  the  tax  were  so  high  as 
to  diminish  the  return  to  capital  below  what  Mill  calls  the 
practical  minimum,  further  accumulations  would  be  checked. 
An  attempt  would  be  made  by  the  employers  of  capital  to 
improve  production  to  such  an  extent  that  the  enhanced 
profits  would  still  give  them  the  same  net  returns  as  before. 
This  phenomenon  is  what  we  have  called  the  transformation 
of  taxation. 1  It  is  sometimes  the  result  of  taxes  on  capital, 
which  act  as  a  stimulus  to  improved  methods  of  production.  To 
the  extent  that  this  is  not  true,  indeed,  further  accumulations 
of  capital  would  be  discouraged.  Even  in  such  a  case,  how- 
ever, it  does  not  follow  that  the  tax  would  be  shifted  to  the 
borrower.  The  loss  would  be  felt  by  the  community  at  large 
in  the  shape  of  a  decline  in  general  prosperity.  It  is  im- 
possible to  state  in  advance  how  much  of  the  burden  would 
be  borne  by  any  particular  class  of  the  community.^ 

B.   An   U?tequal  Tax  on  Capital 

Let  us  now  leave  the  realm  of  hypothesis  and  assumption, 
and  come  to  the  facts  of  every-day  life.  The  actual  tax  on 
capital  is,  as  we  have  seen,  everywhere  an  unequal  tax,  how- 
ever equal  it  may  be  nominally.  The  important  question 
thus  is :  What  is  the  incidence  of  an  unequal  tax  on  capital  ? 
Let  us  discuss  the  incidence  as  between  (i)  the  original 
owner  and  the  new  purchaser;  (2)  the  present  owner  and  the 
borrower ;  or  (3)  the  producer  and  the  consumer. 

I.    The  Incidence  of  a  Capital  Tax  as  between  Original 
Owner  and  New  Purchaser 

This  whole  subject  is  governed  by  the  law  of  the  capitali- 
zation of  incidence,  which  has  already  been  discussed.^  We 
need  thus  only  repeat  our  former  conclusion.     When  a  new 

^  Supra,  p.  5. 

2  John  Stuart  Mill,  Political  Economy,  book  v,  chap.  3,  §  3,  comes  to  prac- 
tically this  conclusion  in  discussing  the  tax  on  profits.  Properly  speaking,  the 
argument  is  applicable  to  the  tax  on  capital  or  interest,  as  stated  in  the  text. 

^  Supra,  pp.  221-226. 


Incidence  of  Taxes  on  Capital  329 

or  suddenly  increased  partial  tax  is  imposed  on  certain  kinds 
of  capital,  the  tax,  if  it  cannot  be  shifted  to  the  consumer  of 
the  article,  or  if  it  does  not  lead  to  a  gradual  cessation  of  the 
production  of  the  commodity,  will  be  discounted  in  a  depre- 
ciation of  the  capital  value  of  the  article  by  a  sum  equal  to 
the  capitalized  value  of  the  annual  tax,  and  will  therefore  fall 
on  the  original  owner  of  the  commodity  before  the  tax  was 
imposed  or  increased,  and  not  on  the  new  purchaser.  In 
other  words,  when  two  classes  of  capital  are  taxed  at  unequal 
rates,  the  excess  of  the  tax  above  the  average  rate  tends  to 
be  borne  by  the  original  holder,  because  the  new  purchaser 
pays  so  much  less  for  capital  on  account  of  the  tax.  Other- 
wise he  will  prefer  to  invest  his  money  in  something  else 
which  will  bring  him  the  usual  interest.  It  is  only  when  the 
tax  is  again  increased  that  the  present  owner  is  compelled  to 
bear  the  new  burden.  The  limitations  of  the  doctrine  must, 
however,  not  be  forgotten;^  for  it  is  just  because  of  failure  to 
notice  these  limitations  that  some  writers  have  fallen  into  the 
error  of  assuming  that  a  tax  on  capital  is  always  a  tax  on  the 
capitalist.  If  a  tax  could  not  be  shifted,  or  if  it  could  not 
destroy  the  producer,  who  has  bought  the  business,  then 
indeed  the  excess  of  an  unequal  tax,  or  the  exemption  from  a 
tax,  would  be  capitalized  or  amortized  into  a  change  in  the 
capital  value  of  the  capital  taxed.  But,  as  we  shall  soon  see, 
it  is  an  error  to  assume  that  the  tax  can  never  be  shifted,  or, 
on  the  other  hand,  that  it  can  never  injure  the  purchaser  who 
continues  to  produce. 

2.     The  Incidence  of  a   Capital  Tax  as  between  Debtor  and 
Creditor  or  Borrower  and  Lender 

To  just  the  same  extent  that  it  is  difficult  for  a  capitalist 
to  shift  a  tax  which  is  imposed  on  all  capital,  it  is  easy  for 
him  to  shift  to  the  borrower  a  tax  which  is  imposed  on  only 

1  For  a  fuller  discussion  of  this  doctrine  as  applied  to  an  important  class  of 
capital,  see  the  essay  on  "  Taxation  of  Corporations,"  in  Seligman,  Essays  in  Tax- 
ation, 9th  ed.  (1921),  pp.  308-311. 


330  Shifting  and  Incidence  of  Taxation 

some  forms  of  capital.  That  is  to  say,  in  the  case  of  an 
unequal  tax  on  capital,  it  is  generally  the  debtor  and  not  the 
creditor  who  suffers.     How  can  this  be  proved  ? 

The  rate  of  interest  on  capital  can  rise  only  through  an 
increase  in  the  demand  for  capital  or  through  a  decrease  in 
the  supply  of  capital.  Some  writers  maintain  that  demand 
will  increase.  It  is  claimed  that  if  a  tax  be  imposed  on  the 
capitalist  lender,  and  if,  accordingly,  the  borrower  be  now 
allowed  to  deduct  from  his  taxable  property  the  amount  of 
the  loan,  the  borrower  will  be  able  to  pay  a  higher  rate  of 
interest.  Since  he  is  no  longer  taxed  on  the  debt,  he  will 
be  able  to  lay  aside  more.  This  will  increase  his  effective 
demand  for  additional  capital.  Because  of  this  increased 
competition  for  capital,  the  rate  of  interest  will  rise,  so  as 
to  leave  the  creditor  uninjured,  notwithstanding  the  imposi- 
tion of  the  tax.^ 

This  argument,  however,  as  Rau  has  shown,  is  inadequate.^ 
In  the  first  place,  it  is  not  necessarily  true  that  the  borrower 
is  allowed  to  deduct  his  debts  from  his  taxable  property ;  in 
the  American  commonwealths  it  is  frequently  the  rule  that 
debts  cannot  be  deducted  from  personal  property.  Secondly, 
even  if  debts  are  deducted,  it  does  not  follow  that  the  compe- 
tition for  capital  will  increase ;  for  only  a  part  of  the  debts 
will  have  been  contracted  for  industrial  purposes,  while  a 
portion  will  have  been  the  result  of  losses  or  accidents.  An 
amelioration  in  the  condition  of  the  debtor  may  therefore  just 
as  possibly  result  in  a  payment  of  old  debts  as  in  a  con- 
traction of  new  debts.  Thirdly,  if  an  increase  of  the  debtor's 
profits  (due,  for  instance,  to  the  exemption  of  the  debt  from 
taxation)  enhances  the  demand  for  capital,  every  decrease  in 
the  rate  of  interest  would  do  the  same ;  and  this  increased 
demand  would  counterbalance  the  decrease  in  the  rate,  so 

^  This  is  the  argument  of  Kroncke,  Grundsdtze  einer  gerechten  Besteuerung, 
1819,  pp.  130-138.  Cf.  the  same  author's  Ausfuhrliche  EinUitung  zur  Reguli- 
rung  der  Steuern,  iSlO,  p.  35. 

2  Rau,  Finanzwissenschaft,  §§  381,  382,  vol.  ii,  pp.  156,  157  (5th  edition).  Cf. 
also  Pantaleoni,  Traslazione  dei  Tributi,  pp.  253-255, 


hicidence  of  Taxes  on   Capital  331 

that  interest  could  never  permanently  fall.  But  this  is  mani- 
festly untrue.  Hence  the  argument  that  a  tax  on  capital 
will  increase  demand  is  untenable. 

On  the  other  hand,  the  argument  that  the  supply  will 
decrease  is  more  successful ;  in  fact,  this  is  the  real  basis 
of  the  whole  theory  of  the  shifting  of  the  capital  tax, 
whether  it  be  a  tax  on  mortgages  or  on  any  other  form  of 
loanable  capital.  The  argument  was  first  advanced  by  Tur- 
got,^  and  rests  really  on  the  fundamental  assumption  of  the 
mobility  of  capital.  Capital,  it  is  said,  shows  its  mobility  in 
two  ways :  if  employed  unremuneratively,  it  will  be  removed 
or  transferred  either  to  some  other  industry  or  occupation 
within  the  country,  which  affords  higher  gains  because  un- 
taxed, or  it  will  be  removed  to  another  country  where  the 
same  industry  or  occupation  is  not  taxed.  In  other  words, 
there  is  both  an  internal  and  an  international  migration  of 
capital  continually  going  on  —  a  migration  from  industry  to 
industry,  and  one  from  country  to  country.  Capital,  the 
argument  continues,  always  seeks  to  secure  the  highest 
returns.  Impose  a  tax  on  the  capitalist  lender,  and  he  will 
insist  on  an  increase  of  the  rate  of  interest  tantamount  to 
the  tax,  or  else  will  transfer  his  capital  to  some  untaxed  occu- 
pation within  or  without  the  country. 

But  while  it  is  abstractly  true  that  a  special  tax  on  capital 
will  be  shifted  to  the  borrower,  it  often  happens  in  practice 
that  the  assumed  absolute  mobility  of  capital  is  countervailed 
by  other  forces  that  may  be  summed  up  under  the  name  of 
economic  friction.  These  opposing  influences  may  be  clas- 
sified as  follows:  (i)  ignorance  of  the  capitalist;  (2)  diffi- 
culty of  removing  the  capital ;  (3)  risk  connected  with  the 
migration  to  other  countries ;  (4)  social  or  other  considera- 
tions which  make  for  permanence  of  investment;  (5)  legal 
obstacles. 

Ignorance  of  the  capitalist,  it  may  be  confessed,  is  not  of 
very  material  importance.      In  a  highly  developed  industrial 

'  Turgot,  "  Observations  sur  un  Memoirc  de  M.  de  Saint-P^ravy  en  faveur  dc 
rimpot  Indirect,"  in  his  iEuvres  (Dairc's  ed.),  i,  p.  423.     Sec  above,  p.  i  J9. 


332  Shifting  and  Incidence  of  Taxation 

organism,  under  the  modern  regime  of  interchange  of  thought 
and  communication  of  news,  the  fact  of  extraordinary  profits 
in  any  particular  occupation  cannot  be  long  concealed.  Espe- 
cially the  distinction  which  concerns  us  here  —  that  between 
taxed  and  untaxed  capital — must  be  obvious  to  the  average 
investor.  With  the  growth  of  modern  society  the  ignorance 
of  the  investor  is  a  factor  of  continually  decreasing  moment.^ 

More  important  is  the  difficulty  of  removing  capital  to  more 
lucrative  employments.  Of  course,  in  the  case  of  loanable 
capital,  as  in  the  stock  exchanges  of  to-day,  this  difficulty  is 
reduced  to  a  minimum.  But  in  proportion  as  the  capital 
assumes  more  and  more  of  a  fixed  character,  its  mobility 
grows  gradually  less.  To  transfer  investments  from  one 
stock  to  another  is  a  very  different  matter  from  abandoning 
all  the  plant  and  machinery  in  one  business  in  order  to  enter 
upon  another  occupation. 

The  risk  connected  with  investments  in  foreign  countries 
is  likewise  not  so  great  as  it  formerly  was.  It  is  indeed 
true  that  creditors,  as  a  rule,  like  to  be  near  their  debtors. 
American  capitalists  prefer  the  less  remunerative  mortgages 
in  the  East  to  the  high  interest-paying  investments  in  the 
Western  states.  Moreover,  it  frequently  happens  that  home 
investors  or  domestic  corporations  are  treated  more  leniently, 
both  as  regards  taxation  and  in  other  respects,  than  foreign- 
ers. It  is  the  survival  of  the  old  law  of  aliens.  This  check 
on  interstate  or  international  transfer  of  capital  is,  however, 
gradually  losing  its  potency. 

Social  considerations  of  various  kinds  often  interpose  a 
more  serious  obstacle.  It  is  not  always  strictly  true,  as  Adam 
Smith  said,  that  "  the  proprietor  of  stock  is  properly  a  citizen 
of  the  world,  and  not  attached  to  any  particular  country." 
Feelings  of  patriotism,  of  local  pride,  of  desire  of  proximity 
to  friends,  of  long  custom  and  old  usage,  sometimes  play  a 
considerable  role.    Although  they  may  be  called  non-economic 

^  For  a  proof  that  it  is  of  some  importance,  cf.  ClifTe-Leslie,  "  On  the  Philo- 
sophical Method  of  Political  Economy,"  in  his  Essays  in  Political  and  Moral 
Philosophy,  pp.  235-237. 


Incidence  of  Taxes  07i   Capital  333 

motives,  they  are  none  the  less  to  be  reckoned  with  by  the 
economist. 

Finally,  the  law  may  prevent  the  free  migration  of  capital. 
Under  the  American  state  bank  laws,  for  instance,  there  was 
very  generally  a  provision  that  banks  could  invest  their 
deposits  only  in  certain  specified  state  securities  or  mort- 
gages. The  large  demand  for  state  mortgages  in  such  cases 
may  have  contributed  toward  lowering  the  usual  interest 
allowed  on  the  mortgage,  and  may  thus  have  prevented  the 
whole  of  the  burden  of  the  tax  from  being  shifted  to  the 
borrower. 

While,  therefore,  it  may  be  laid  down  as  a  general  rule  that 
a  tax  on  loanable  capital  will  be  shifted  from  the  creditor  to 
the  debtor,  the  conditions  which  interfere  with  the  absolutely 
free  mobility  of  capital  may  be  sufficiently  strong  to  prevent 
this  transference  of  the  tax  from  becoming  entirely  complete. 
The  appUcation  of  this  principle  to  the  question  of  taxa- 
tion of  mortgages  is  obvious,  but  is  of  such  commanding 
importance  in  the  United  States  that  it  deserves  a  somewhat 
fuller  discussion. 

As  a  general  rule  it  may  be  stated  that  a  tax  on  mortgages 
assessed  to  the  lender  of  the  money,  that  is  the  mortgagee  or 
person  to  whom  the  property  is  mortgaged,  will,  to  the  extent 
that  it  is  a  special  or  exclusive  tax,  be  shifted  to  the  mortgagor, 
i.e.  the  borrower.  The  process  of  shifting  will  usually  take 
the  form  of  an  express  agreement  in  the  bond  accompanying 
the  mortgage  that  the  borrower  shall  pay  all  taxes  imposed 
on  the  land.  Where,  however,  such  agreements  are  invalid, 
as  is  the  case  in  some  states,  the  same  result  will  be  attained 
through  an  increase  in  the  rate  of  interest  on  the  loan. 
Where  usury  laws  exist,  restricting  the  legal  rate  of  interest, 
and  where  the  mortgage  rate  plus  the  tax  would  exceed  the 
legal  rate,  the  result  is  the  employment  of  subterfuges  which 
usually  involve  a  slight  risk  to  the  lender,  with  the  consequence 
that  the  borrower  must  pay  a  sum  which  somewhat  exceeds 
the  rate  of  the  tax.  In  some  cases,  this  addition  to  the  rate 
of  the  tax  is  found  even  where  no  usury  law  exists,  or  where 


334  Shifting  and  Incidence  of  Taxation 

the  mortgage  rate  plus  the  tax  is  well  within  the  maximum 
set  by  the  law,  and  may  then  be  ascribed  to  the  fact  that 
agreements  with  the  mortgagor  to  pay  the  tax  are  void,  and 
that  the  lender  desires  to  protect  himself  against  the  risk  of 
being  declared  to  fall  within  the  prohibition  of  the  law.  Thus, 
in  California,  where  it  was  provided  that  the  mortgage  should  be 
taxed  in  the  locality  where  the  mortgaged  property  is  situated, 
and  that  if  the  mortgagor  paid  the  tax  he  might  recoup  it 
from  the  mortgagee,  agreements  to  the  contrary  being  void,  it 
has  been  shown  by  a  careful  statistical  investigation  that  after 
the  enactment  of  the  law  the  interest  rate  on  mortgages,  as 
compared  with  other  classes  of  investment,  rose,  not  only  by 
the  amount  of  the  tax,  but  by  a  slight  sum  in  addition.^ 

A  more  recent  inductive  verification  of  the  law  is  found  in 
an  investigation  carried  on  in  New  York.  Here,  as  in  many 
other  states,  mortgages  were  subject  to  the  general  property 
tax,  but  in  practice,  and  especially  in  the  industrial  centres, 
were  rarely  assessed.  Occasionally,  however,  a  mortgage  was 
taxed,  and  it  was  estimated  by  those  most  competent  to  judge 
that  in  some  localities  where  the  general-property-tax  rate 
varied  from  two  to  three  per  cent,  the  compensation  demanded 
by  the  lender  for  the  risk  of  the  assessor  discovering  a  mort- 
gage represented  somewhat  less  than  one  half  of  one  per 
cent,  which  would  be  added  to  the  mortgage  rate.^  In  1905 
a  new  law  was  enacted,  imposing  a  specific  tax  on  mortgages, 
and  providing  for  a  rigorous  enforcement,  the  tax  of  one  half 
of  one  per  cent  being  payable  at  the  office  when  and  where 
the  mortgage  was  recorded.  Mr.  Lawson  Purdy,  then 
secretary  of  the  New  York  Tax  Reform  Association,  there- 
upon procured  a  complete  transcript  of  all  mortgages  recorded 
for  six  months  in  several  typical  counties,  as  well  as  of  all 
mortgages  recorded  in  certain  adjoining  counties  in  Massa- 
chusetts and  Pennsylvania,  mortgages  in  Pennsylvania  being 

^  Cf.  "The  Taxation  of  Mortgages  in  California,"  by  Carl  C.  Plehn,  in  The 
Yale  Review,  viii  (1899),  pp.  31-67. 

"^Report  of  the  Special  Committee  on  Taxation  [the  so-called  Stranahaa 
Committee],  appointed  by  the  New  York  Legislature  of  1899. 


Incidence  of  Taxes  on   Capital  335 

specially  taxable  at  a  very  low  rate,  and  mortgages  in  Massa- 
chusetts being  virtually  exempt,  as  explained  above.  The 
result  of  the  exhaustive  examination^  was  a  conclusive 
corroboration  of  the  general  principle,  and  the  ascertainment 
of  two  facts:  first,  that  the  liability  of  mortgages  to  taxation 
under  the  old  law  increased  the  rate  of  interest  by  a  mill  and 
a  half  in  some  counties,  and  by  as  much  as  three  or  four 
mills  (y^  of  I  %  to  -^^  of  1%)  in  other  counties  ;  and  secondly, 
that  the  new  so-called  annual  mortgage  tax  of  one-half  of 
one  per  cent  augmented  the  rate  of  interest  by  more  than  the 
amount  of  the  tax.  The  evidence  was  so  overwhelming  that 
the  opponents  of  the  system  were  able  to  secure  the  repeal 
of  the  law  and  the  substitution  in  its  stead  of  a  so-called 
recording  tax  whereby  mortgages  are  not  subject  to  a  period- 
ical assessment,  but  are  taxed  only  once,  when  they  are 
recorded. 

While  the  general  rule  may  thus  be  declared  to  be  established 
beyond  peradventure  of  doubt,  a  more  recent  investigation 
into  the  situation  in  Wisconsin  discloses  some  of  the  practical 
qualifications  of  the  theory  as  mentioned  above.^  In  Wiscon- 
sin up  to  1901  the  system  of  mortgage  taxation  was  like  that 
in  most  of  the  other  states,  viz.  a  nominal  inclusion  of  mort- 
gages among  the  taxable  personal  property,  but  their  virtual 
escape  in  large  part  from  assessment.  In  1901  a  more 
vigorous  assessment  under  the  supervision  of  the  state  tax 
commission  was  initiated,  resulting  in  the  reaching  of  a  large 
proportion  of  the  mortgages,  in  some  counties  as  high  as 
ninety  per  cent.  This  engendered  such  widespread  dissatis- 
faction as  to  cause  the  repeal  of  the  law  and  the  adoption  in 
1903  of  what  is  virtually  the  Massachusetts  system,  whereby 
the  mortgage  is  treated  as  a  part  of  the  real  estate,  with  per- 
mission to  the  parties  in  interest  to  arrange  between  them- 
selves as  to  who  should  pay  the  taxes.     The  result  was,  as  in 

1  Mortgage  Taxation  and  Interest  Rates.  Abstracts  of  Mortgage  Records  in 
Certain  Counties  of  Ne^v  York,  Massachusetts,  and  Pennsylvania,  illustrating  the 
Effect  of  the  New  Annual  Mortgage  Tax  Law.  New  York,  1906.  With  appendix 
and  diagrams.  '^  Supra,  p.  331. 


336  Shiftmg  a7id  hicidence  of  Taxation 

Massachusetts,  a  virtual  exemption  of  mortgages,  the  lender 
not  being  assessed  at  all  and  the  borrower,  while  paying  the 
tax,  being  permitted  to  deduct  the  amount  of  the  mortgage 
from  the  value  of  the  land.  The  difference  between  the  rigid 
taxation  in  the  two  years  prior  to  1904  and  the  exemption 
thereafter  afforded  an  admirable  opportunity  to  study  the  in- 
fluence of  the  tax  on  the  rate  of  interest. 

This  study  was  undertaken  by  Professor  T.  S.  Adams  and 
was  published  as  an  appendix  to  the  report  of  the  commis- 
sion,^ On  comparing  the  conditions  in  various  counties  of 
Wisconsin  and  some  adjacent  counties  in  Minnesota,  where 
mortgages  were  also  taxable  at  the  local  rate,  it  was  found 
that  in  some  localities,  like  Menominee  County,  Minnesota, 
the  rate  of  interest  rose  by  the  amount  of  the  tax,  but  that  in 
other  places,  like  Clayton  County,  Wisconsin,  there  was  no 
appreciable  rise  at  all.  The  chief  points  of  difference  were 
ascertained  to  be  these :  in  Clayton  County,  the  tax  rate  was 
very  low — -^^  of  i  %  ,  in  Menominee  County,  it  was  very  high, 
over  2|  % ;  in  Clayton  County  the  local  supply  of  money 
was  large,  and  the  demand  for  capital  not  very  great;  in 
Menominee  there  were  practically  no  local  savings  and  a 
great  need  of  capital  for  developing  the  country  ;  in  Clayton 
County  land  values  were  relatively  stable  and  well  fixed,  in 
Menominee  as  a  new  county  land  values  were  still  very 
speculative.  The  consequence  was  that,  as  Professor  Adams 
put  it,  "  a  slight  contraction  of  the  supply  that  in  Menominee 
would  send  interest  rates  soaring,  would  exercise  no  appreci- 
able effect  in  Clayton."  ^ 

In  other  words,  the  general  rule  which  explains  the  shifting 
of  a  mortgage  tax  to  the  borrower  may  be  modified  by  such  con- 
siderations as  (i)  that  the  tax  rate  is  unusually  low,  or  (2)  that 
the  normal  rate  of  interest  on  mortgages  is  exceptionally  high, 
or  (3)  that  the  demand  for  capital  is  inordinately  keen,  or 

^  Third  Biennial  Report  of  the  Wisconsin  Tax  Commission,  Appendix  B, 
1907.  A  summary  of  the  conclusions  will  be  found  in  an  article  by  Professor 
Adams  on  "  Mortgage  Taxation  in  Wisconsin  "  in  the  Quarterly  Journal  of  Eco- 
nomics, xxii  (1907),  pp.  1-27.  *  Of.  cit.,  p.  17. 


Incidence  of  Taxes  on  Capital  337 

(4)  that  the  stability  of  land  values  is  not  sufficiently  assured  to 
attract  an  influx  of  capital  from  the  outside  and  thus  to  affect 
the  supply.  It  must,  however,  not  be  overlooked  that  while 
such  cases  may  obviously  occur  in  a  new  country  the  fact 
that  they  tend  to  become  more  and  more  infrequent  is 
scarcely  open  to  doubt. 

When,  as  is  usually  the  case,  a  tax  on  mortgages  is  shifted, 
the  ulterior  effects  are  sometimes  difficult  to  disentangle. 
If  the  money  is  borrowed  on  agricultural  land,  the  effect  is 
precisely  analogous  to  that  of  the  land  tax  discussed  above.^ 
If  the  money  is  borrowed  on  city  real  estate,  it  may  have  a 
series  of  wide  consequences.  In  the  United  States,  e.g.  im- 
provements on  vacant  sites  are  made,  as  a  general  rule,  with 
borrowed  money,  the  builders'  loans  aggregating  a  very  large 
percentage  of  the  total  investment.  A  mortgage  tax  conse- 
quently presses  with  severity  on  the  encumbered  real  estate, 
and  becomes  to  all  intents  and  purposes  a  tax  on  the  build- 
ings. This,  as  we  know,  will  tend  to  diminish  building 
operations  until  rents  are  increased,  with  ultimate  effects  on 
the  entire  community.  Thus  here  again  it  does  not  suffice  to 
limit  the  study  of  the  effects  of  taxation  to  the  question  of  the 
original  assessment  or  the  initial  shifting. 

3.    TJie  Incidence  of  a  Capital  Tax  as  between  Producer  and 

Consumer 

This  is  practically  the  same  as  a  tax  on  profits.  The 
investor  of  capital  in  a  productive  industry  does  not  make 
any  but  an  arbitrary  distinction  between  his  interest  and  his 
profits  on  the  investment.  The  rate  of  interest  is  fixed  by 
the  relative  amount  of  loanable  capital,  that  is,  it  is  a  matter 
of  adjustment  between  borrower  and  lender.  But  as  soon  as 
it  becomes  a  question  of  adding  the  tax  to  the  price  of  the 
goods  the  problem  is  the  same  as  that  of  the  tax  on  profits. 
This  topic  is  of  sufficient  importance  to  demand  a  separate 
chapter. 

'  Supra,  chap.  ii. 


CHAPTER  V 
Taxes  on  Profits 

In  discussing  the  incidence  of  a  tax  on  profits,  as  between 
producer  and  consumer,  it  is  necessary  to  make  several  dis- 
tinctions. Profits  may  be  taxed  directly,  as  when  the  tax 
is  imposed  on  the  net  receipts  or  profits  of  the  producer ;  or 
they  may  be  taxed  indirectly,  as  in  the  case  of  a  fixed  license, 
or  of  a  tax  on  stock  in  trade,  or  of  a  tax  on  sales.  Taxes  on 
sales,  however,  may  themselves  be  subdivided  into  two  cate- 
gories. The  producer  may,  in  the  one  case,  be  taxed  on  the 
amount  of  commodities  produced  or  sold  by  him.  This  is 
equivalent  to  a  so-called  indirect  tax  on  commodities.  It  is 
immaterial,  from  the  standpoint  of  incidence,  whether  such  a 
tax  is  raised  from  the  producer  or  from  the  consumer.  In 
the  other  case,  the  producer  may  be  taxed,  not  on  the  quantity 
produced,  but  on  the  gross  receipts  from  sales  —  which  is 
not  necessarily  the  same  thing.  As  an  indirect  tax  on 
profits,  a  tax  on  gross  receipts  occupies,  as  it  were,  an  inter- 
mediate position.  It  is,  in  some  sort,  a  cross  between  a  tax 
on  net  receipts  and  a  tax  on  the  quantity  sold. 

Consequently,  if  we  use  the  term  "profits"  in  the  wider 
sense,  to  signify  the  revenue  which  accrues  from  the  sale 
or  exchange  of  commodities,  there  are  really  four  chief  kinds 
of  taxes  which  affect  profits  and  thus  influence  the  relation 
between  producer  and  consumer.     These  are  :  — 


I 
sold. 


A  tax  varying  with  gross  production  or  gross  amount 


2.  A  tax  varying  with  gross  receipts. 

3.  A  tax  varying  with  net  receipts. 

4.  A  tax  of  fixed  amount. 

338 


Taxes  on  Profits  339 


I.    A    Tax  on  Gross  Production  or  Gross  Amount  sold 

This  is  practically  the  same  as  a  tax  on  commodities. 
Whether  the  tax  is  a  so-called  "indirect"  tax,  levied  on  the 
commodities,  or  whether  it  is  levied  on  the  producer  accord- 
ing to  each  unit  produced  or  sold,  is  immaterial.  Thus,  in 
some  of  the  American  commonwealths,  the  taxes  on  sewing- 
machine  companies  or  telephone  companies  are  proportioned 
to  each  sewing-machine  or  telephone  sold  or  produced.  This 
is  the  same,  so  far  as  the  question  of  incidence  is  concerned, 
as  if  an  indirect  tax  had  been  levied  on  each  machine  or 
telephone. 

Let  us  mention  first  the  case  of  a  tax  on  particular  com- 
modities produced  or  sold  under  the  law  of  competition. 
This  case  is  the  normal  one  which  has  been  treated  above  in 
the  chapter  on  general  principles.  We  have,  therefore,  only 
to  repeat  the  general  conclusions  there  reached,^  namely, 
that  the  tax  is  apt  to  be  shifted  to  the  consumer  in  whole  or 
in  part,  but  that  the  degree  to  which  the  tax  is  shifted  varies 
inversely  as  the  elasticity  of  the  demand  and  directly  as  the 
elasticity  of  the  supply. 

In  most  cases  the  tendency  of  an  increase  in  price  is  to 
diminish  the  demand  and,  therefore,  the  output ;  but  if  the 
falling  off  in  demand  is  so  slight  that  the  former  marginal 
producer  still  remains  the  marginal  producer,  or  if  the  margin 
between  the  price  and  the  cost  to  the  more  efficient  producer 
is  so  slight  that  he  cannot  crowd  out  the  former  marginal 
producer,  then  the  whole  of  the  tax  will  be  shifted  to  the 
consumer.  This  is  a  frequent  case  —  perhaps  even  the  ordi- 
nary case  —  under  the  regime  of  competition.  But  conditions 
may  arise  under  which  only  a  part  of  the  tax  will  be  shifted. 
These  conditions  will  be  present  when  an  industry  has  not 
only  reached  the  point  of  diminishing  returns,  but  has  for 
some  time  been  obeying  that  law,  so  that  any  increase  of 
price  due  to  the  tax  will  lead  to  a  smaller  output  with  a  lower 

^  Supra,  p.  248. 


340  Shifting  and  Incidence  of  Taxation 

marginal  cost,  and  therefore  to  a  new  price  below  the  old 
price  with  the  whole  tax  added.^  But  the  same  result  —  the 
incomplete  shifting  of  the  tax  —  will  follow  when,  owing  to 
the  imposition  of  the  tax,  the  former  marginal  producer  is 
now  replaced  by  a  new  marginal  producer  who  can  supply 
the  product  at  a  lower  cost,  and  when  the  new  price  will  now 
be  a  little  (or  perhaps  even  much)  less  than  the  old  price,  or 
the  old  marginal  cost,  with  the  tax  added.  The  ordinary 
conditions  of  progress,  as  we  know,  result  in  a  continual 
crowding  out  of  the  marginal  producer  by  more  favored  com- 
petitors. This  process  will  be  accelerated,  and  the  marginal 
producer  will  be  replaced  more  quickly,  as  we  have  seen ; 
first,  when  the  demand  for  the  commodity  is  very  elastic ; 
second,  when  there  is  a  great  difference  in  the  efficiency  of 
the  various  producers ;  and  third,  when  the  industry  obeys 
the  law  of  increasing  rather  than  of  diminishing  returns.^ 

To  the  extent  that  the  imposition  of  a  tax  hastens  this 
process,  the  tendency  will  be  that  somewhat  less  than  the 
whole  of  the  tax  will  be  shifted.  For  the  entire  tax  will 
be  shifted  only  so  long  as  the  old  marginal  producer  still 
remains.  To  what  degree,  now,  will  a  tax  accelerate  this 
process .-' 

A  tax  on  output  —  that  is,  on  each  unit  produced  —  will 
normally  affect  the  elasticity  of  the  demand,  and  thus  the 
amount  produced.  If  this  diminution  of  output  is  divided 
proportionally  among  all  competitors,  it  will  not  change  their 
relative  positions.  But  if  there  is  a  great  difference  in  the 
efficiency  of  the  various  producers,  and  if  the  imposition  of 
a  tax,  by  making  it  more  difficult  for  the  marginal  producer 
to  hold  his  own,  brings  about  a  greater  diminution  in  his 
output  than  in  that  of  his  competitors,  the  tendency  for  the 
larger  producer  to  crowd  out  the  smaller  will  be  accentuated; 
and,  because  of  the  economies  in  production,  somewhat  less 
than  the  entire  tax  will  be  added  to  the  price.  If,  however, 
the  movement  toward  concentration  goes  far  enough  to  pro- 
duce a  complete  monopoly,  price  will  be  fixed  by  conditions 

^  Cf.  supra,  p.  245.  2  QT  ^ffpf-a^  pp   243,  244. 


Taxes  on  Profits  341 

of  monopoly  value  to  be  discussed  in  a  moment ;  and  while 
ordinarily  only  a  part  of  the  tax  or  the  whole  tax  will  be 
added  to  the  price,  exceptional  cases  may  occur  where  the 
monopoly  is  so  secure  and  the  demand  so  stable  that  the 
new  price  may  even  exceed  the  old  price  with  the  tax  added. 
A  good  example  of  such  an  exceptional  result  is  the  match 
tax  during  the  Civil  War.^ 

When  the  competitive  industry  obeys  the  law  of  increasing 
returns,  it  is  necessary  to  make  a  distinction.  The  fact  that 
an  industry  is  subject  to  the  law  of  increasing  returns  tends, 
as  we  know,  strongly  toward  concentration ;  but  as  long  as 
the  old  competitors  are  left  — that  is,  in  the  interval  during 
which  the  old  marginal  producer  continues  to  produce  —  the 
smaller  output,  due  to  the  imposition  of  the  tax,  will  be  sup- 
plied at  a  higher  marginal  cost,  and  the  new  price  will  not 
tend  to  be  less  than  the  old  price  with  the  tax  added.^  But 
after  the  process  has  been  completed  —  if  it  is  ever  com- 
pleted —  and  the  industry  is  now  monopolized,  the  price  may 
not  be  quite  so  high  as  before,  because  under  conditions  of 
monopoly,  other  things  being  equal,  it  is  conceivable  that 
costs  may  be  reduced  and  the  point  of  maximum  monopoly 
revenue  may  be  lower.  The  interesting  corollary  from  the 
above  considerations  is  that  in  the  transitional  cases  of  com- 
petitive industries  subject  to  the  law  of  increasing  returns, 
the  tendency  toward  monopoly  is  checked  rather  than  accel- 
erated by  a  tax  on  output ;  while,  in  the  usual  case  of  com- 
petitive industries  subject  to  the  law  of  diminishing  returns, 
the  imposition  of  a  tax  —  under  certain  conditions  at  least  — 
may  weaken  the  forces  that  oppose  the  tendency  toward 
monopoly  and  may  make  it  more  difficult  for  the  small  pro- 
ducer to  remain  in  business. 

We  may  sum  up,  therefore,  by  saying  that  in  the  case  of 
competition  the  usual  result  of  a  tax  on  output  or  gross 
amount  produced  or  sold  is  that  the  entire  tax  will  be  shifted 
to  the  consumer,  but  that  special  cases  may  arise  where  the 
price  will  be  augmented  by  only  a  part  of  the  tax.     Such 

1  Cf.  supra,  p.  354.  2  Qf  supra,  p.  245. 


342  Shifting  and  Incidence  of  Taxation 

special  cases  are  chiefly  to  be  found  not  only  when  the 
industry  has  been  obeying  the  law  of  diminishing  returns, 
but  also  when  the  tax  enables  a  more  capable  producer  to 
undersell  his  former  competitors  at  the  margin  of  profitable 
production. 

We  come  next  to  the  case  of  a  monopoly.  The  law  of 
monopoly  value  is,  we  remember,  in  some  respects  different 
from  that  of  competitive  value.  The  monopolist  will  always 
demand  the  very  highest  price  at  which  he  can  sell  the  great- 
est number  of  products.  To  the  extent  that  his  monopoly  is 
complete  he  is  uninfluenced  by  the  fact  that  the  article  might 
be  produced  more  cheaply  by  others,  —  a  consideration  of 
vital  importance  in  the  whole  domain  of  competitive  prices. 
So  far  as  concerns  the  incidence  of  the  particular  tax  with 
which  we  are  at  present  dealing  —  namely,  that  on  gross  pro- 
duction or  on  commodities  —  the  monopolist  and  the  com- 
petitive producer  are,  however,  in  some  respects  subject  to 
practically  the  same  influences. 

If  a  tax  is  imposed  on  every  article  produced,  the  monopo- 
list may  prefer  to  restrict  his  production  and  to  raise  his  price. 
Although  he  sells  less  than  before,  because  of  the  increased 
price,  his  net  profits  may  be  larger,  because  he  pays  a  smaller 
tax  than  he  would  pay  if  he  produced  more  extensively.  Al- 
though his  gross  receipts  diminish,  his  expenses  diminish  still 
more.  If  the  tax  is  small  and  the  demand  is  apt  to  fall  off  a 
great  deal  with  an  increase  of  price,  the  monopolist  will  be 
likely  to  find  it  profitable  to  bear  more  of  the  tax  himself.  If, 
on  the  other  hand,  the  demand  is  less  elastic,  he  will  be  apt 
to  shift  more  and  more  of  the  tax  to  the  consumer.  The 
degree  to  which  he  will  add  the  tax  to  the  price  depends 
chiefly  on  the  height  of  the  tax  as  compared  with  the  extent 
of  the  production  and  the  elasticity  of  the  demand.  In  these 
respects  the  influence  of  a  tax  under  conditions  of  monopoly 
is  akin  to  that  of  a  tax  under  conditions  of  competition.  On 
the  other  hand,  while  the  tax  will  ordinarily  be  shifted  in 
whole  or  in  part,  it  may  happen  that  no  part  of  the  tax  will 


Taxes  07i  Profits  343 

be  shifted  at  all,^  Let  us  proceed  to  consider  this  possibility 
somewhat  more  in  detail. 

Let  it  be  assumed  that  a  monopolist  can  sell,  at  the  price 
of  $5  each,  1000  units  of  a  particular  article.  Let  it  be  fur- 
ther assumed  that  the  cost  of  each  unit  is  $2.  His  gross  re- 
ceipts will  then  be  ^5000,  and  his  net  profits  (5  —  2)  x  1000  = 
1^3000,  which  may  be  declared  to  be  his  maximum  monopoly 
revenue.  If  he  charged  more,  the  sales  would  fall  off;  if  he 
charged  less,  the  receipts  would  be  smaller.  In  either  case 
his  net  profits  would  diminish.  Let  it  be  assumed  that,  if  he 
charged  $6  a  unit,  the  sale  would  fall  off  to  700  units.  His 
gross  receipts  would  be  6  x  700  =  ^4200,  and  his  net  profits 
(6  —  2)  X  700  =  $2800,  or  less  than  before.  If,  on  the  con- 
trary, he  charged  only  $4  a  unit,  his  sales  would  increase,  let 
us  say,  to  1 200  units,  his  gross  receipts  would  be  $4800, 
and  his  net  profits  (4  —  2)  x  1200=  ^2400.  He  will  there- 
fore always  prefer  the  price  $^,  which  marks  the  point  of 
maximum  monopoly  revenue. 

If  the  government  now  imposes  a  tax  of  j^i  a  unit,  what 
will  be  the  result  .-'  The  net  return  on  each  unit  is  reduced 
to  $2,  the  total  net  profits  to  $2000.  If  the  monopolist  at- 
tempts to  add  the  whole  tax  to  the  price,  he  will  sell  only 
700  units ;  and  since  the  cost  per  unit  has  been  increased  by 

'  Professor  Graziani,  in  his  Istituzioni  di  Scienza  delle  Finame,  1897,  P-  335> 
substantially  accepts,  on  this  particular  point,  the  argument  in  the  text.  Professor 
Edgeworth,  who  originally  criticised  the  statement  in  the  text  in  the  Economic 
Journal,  vii  (1897),  P-  ^27,  made  the  same  criticism  of  Professor  Graziani's  sub- 
secjuent  acceptance  of  this  position  in  a  review  of  the  latter's  work  in  the  luo- 
notnic  Journal,  vii,  pp.  405,  406.  Professor  Graziani  came  to  the  defence  of  his 
position  in  a  reply  entitled  Sulla  Kepercussione  delle  Imposte  nei  Casi  di  Monopolio, 
published  in  the  Studi  Senesi,  xiv,  p.  5,  and  also  separately  (Turin,  1898).  A 
rejoinder  to  this  by  Professor  Edgeworth  appeared  in  the  Economic  Journal,  viii 
(1898),  pp.  234-236.  In  1899  Professor  Edgeworth  returned  to  the  charge  in  an 
article  entitled  "  Professor  Seligman  on  the  Mathematical  Method  in  Political 
Economy"  in  the  Economic  Journal,  ix,  pp.  286-315.  Three  years  later  Pro- 
fessor P.  Jannacone  summed  up  the  entire  controversy  in  a  monograph,  Questioni 
Controi'erse  nella  Teoria  della  Traslazione  delle  Imposte  in  Regime  di  Monopolio. 
Turin,  1902.  Cf.  also  the  article  by  Natoli,  "  I  Valori  di  Monopolio  "  in  Kiforma 
Sociale,  1900,  pp.  329  et  seq.  and  429  et  seq.,  and  Graziani,  I.a  Teoria  Geuerale 
della  A'iperi  ussione  delle  Jtnpoile,  1899,  pp.  6- 1 8. 


344         Shifting  and  Incidence  of  Taxation 

the  tax  to  ^3,  his  net  profits  will  be  700  x  (6  -  3)  =  $2\QO. 
Granting  that  this  is  the  highest  net  return  that  the  new  con- 
ditions admit,  the  monopolist  will  increase  the  price  from  $5 
(which  gives  him  ;^2000  profits)  to  ;^6  (which  gives  him  $2100 
profits).     The  entire  tax  will  be  shifted  to  the  consumer. 

On  the  other  hand,  suppose  that  the  tax  is  only  \  of  a  dollar. 
Then  the  cost  per  unit  would  be  $2\,  the  net  profits  at  price 
%l  would  be  (5  —  2\)  X  1000  =  2|  X  1000  =  ^2750  ;  while  the 
net  profits  at  price  $6  would  be  (6  —  2|)  x  700  =  3|  x  700 
=  1^2625.  Admitting  that  other  prices  yield  profits  likewise 
inferior,  the  monopolist  would  continue  to  charge  only  $^  ; 
that  is,  he  would  not  raise  prices  at  all. 

It  might  be  said,  however,  that  the  admission  in  the  last 
sentence  is  not  permissible.^  A  simple  arithmetical  example, 
however,  will  show  that  the  conditions  may  arise  under  which 
any  other  price  than  the  original  one  would  give  the  monopo- 
list less  net  profits. 

Let  it  be  assumed  that,  instead  of  adding  the  whole  tax  to 
the  price,  the  monopolist  adds  only  part  of  it.  Let  it  be  fur- 
ther assumed  that  at  price  $^\  he  will  sell  900  units ;  at  price 
;^5^,  825  units;  at  price  $5|,  750  units;  and,  as  we  have 
already  previously  stated,  at  price  %6,  700  units.  His  net 
profits,  then,  after  a  tax  of  ^  of  a  dollar  had  been  imposed, 
would  be :  — 

At  price  5 
At  price  5^ 
At  price  5I 
At  price  5I 
At  price  6 

In  other  words  the  monopolist  will  continue  to  find  his 
greatest  profits  in  continuing  to  charge  the  original  price,  1^5. 
It  is  clear,  therefore,  that  cases  may  arise  in  which  it  will  be 

^  Professor  Edgeworth,  for  instance,  urges  this  criticism.  The  only  cases  in 
■which  it  is  possible  for  the  monopolist  to  bear  the  whole  tax  himself,  says  he,  are 
(a)  when  it  is  not  in  the  power  of  the  monopolist  to  increase  his  output,  and  {b) 
when  the  monopolist  is  the  sole  buyer.  Cf.  Economic  Journal,  vii,  p.  227.  That 
these  are  not  the  only  cases,  however,  is  clear  from  the  argument  in  the  text. 


.  .  .  (5 

-2i)  X 

1000  =  2|  X 

1000  =  $2750. 

.  .  .  (5i 

-2l)X 

900  =  3  X 

900  =  $2700. 

•  •  •  (5^ 

-2DX 

825  =  3I-  X 

800  =  $2681.25 

.  .  .  (5l 

-2i)  X 

750  =  3i  X 

750  =  $2625. 

.  .  .  (6 

-2i)X 

700  =  3f  X 

700  =  $2625. 

Taxes  on  Profits  345 

profitable    for  the  monopolist  to   bear  the   burden  himself.^ 
No  part  of  the  tax  will  then  be  shifted  to  the  consumer. 

Granting,  however,  that  this  is  exceptional,  and  that  in 
ordinary  cases  the  monopolist  will  shift  at  least  a  part 
of  the  burden,  it  may  be  stated  that  after  the  point  of 
maximum  monopoly  revenue  has  been  reached  the  more 
elastic  the  demand,  the  smaller  will  be  the  proportion  of 
the  tax  that  he  is  apt  to  shift  to   the  consumer.     It  may 


1  Cournot  states  that  the  tax  must  always  be  shifted  (except  in  the  cases  men- 
tioned in  the  preceding  note).  Professor  Edgeworth  (^Economic  Journal,  vii, 
p.  405)  thinks  that  this  is  true  "  in  general."  Later,  when  hard  pressed  by  Pro- 
fessor Graziani,  he  seeks  to  maintam  his  position  by  assuming  that  "  the  change 
of  price  is  small,"  "  by  taking  A/  sufficiently  small"  {Economic  Journal,  viii, 
p.  235).  But  is  it  fair  to  assume  that  a  small  change  of  price  is  "more  general" 
than  a  great  one  ?  And  would  Professor  Edgeworth's  elaborate  formuht  all  hold 
good,  if  the  change  of  price  were  substantial.''  It  is  not  denied  that,  if  we  varied 
the  figures  in  the  text,  it  might  happen  that  when  the  cost  per  piece  was  2\,  the 
price  which  yields  maximum  profit  might  become  greater  than  5.  What  it  is 
sought  to  prove  by  the  above  illustration  is  that  this  result  does  not  necessarily 
follow.  We  venture,  therefore,  still  to  cling  to  the  position  in  the  text,  notwith- 
standing that,  in  the  opinion  of  Professor  Edgeworth,  the  opposite  point  has  been 
"  proved  formally  and  mathematically  by  Cournot,  informally  and  in  plain  prose  " 
by  himself.  See  Economic  Journal,  vii,  p.  405,  note  I.  Wicksell,  on  the  other 
hand,  thinks  that,  theoretically,  the  monopolist  will  always  add  the  tax  to  the 
price,  but  that  practically  he  will  often  not  do  so.  —  Finanztheoretische  Unter- 
suchungen,  p.  12.  In  his  reply  in  the  Economic  Journal,  ix,  p.  307,  Professor 
Edgeworth  concedes  the  accuracy  of  the  above  figures,  but  contends  that  "  it 
was  not  necessary  in  an  article  on  pure  theory  to  notice  this  obvious  limitation, 
which  may  fairly  be  relegated  to  the  category  o(  friction." — In  his  Istituzioni 
di  Economia  Politica,  1904,  pp.  232-236  (2d  ed.,  1908,  pp.  242-246),  Professor 
Graziani  restates  his  position  at  some  length.  In  his  review  of  this  passage  in 
the  Economic  Journal,  xiv  (1904),  p.  607,  Professor  Edgeworth  concedes  that 
Graziani  is  "  formally  correct,"  although  he  now  still  maintains,  not  the  error,  but 
the  "  insignificance  "  of  the  proposition.  —  Professor  Jannacone,  in  reviewing  the 
controversy,  points  out  that  Professor  Edgeworth  has  omitted  properly  to  esti- 
mate the  degree  of  approximation  of  the  abstract  proposition  to  the  actual  facts. 
His  proposition  is  what  Jannacone  calls  one  of  first  approximation  only,  resting 
on  the  two  hypotheses,  («)  that  the  monopolist  can  vary  the  price  for  infinitesimal 
quantities,  and  {b)  that  to  every  variation  in  price,  however  small,  there  corre- 
sponds an  inverse  variation  in  demand.  These  two  hypotheses,  however,  as 
Jannacone  proves  in  great  detail,  are  far  from  being  necessarily  true  ;  and  with 
the  disappearance  of  the  suppositions  the  seemingly  irrefragable  law  of  Professor 
Edgeworth  itself  disappears.  — Jannacone,  Questioni  Controverse,  etc.,  pp.  12-16. 


346  Shifting  and  Incidence  of  Taxation 

be  wise  to  illustrate  this  also  by  some  simple  arithmetical 
figures.^ 

Demand  is  said  to  be  more  elastic  when  each  successive 
increase  of  price  leads  to  a  greater  falling  off  in  demand. 
The  example  above  was  based  on  the  assumption  that,  at  the 
price  of  $6,  the  demand  would  fall  to  700.  Let  us  now 
assume  that,  with  a  more  elastic  demand,  the  sales  at  price 
$6  would  fall  off  as  far  as  675  units  ;  and  let  us  further 
assume  that,  with  a  more  stable  demand,  the  sales  at  the  price 
$6  would  fall  off  only  to  725  units.  Now,  with  the  more  elastic 
demand,  the  net  profits  would  be,  after  the  tax  of  $1  per  unit 
was  imposed  (6—  3)  x  675  =  $2025  ;  but  with  the  less  elastic 
or  more  stable  demand,  the  net  profits  would  be  (6  —  3)  X 
725  =  1^2175.  Hence,  the  more  stable  the  demand,  the  greater 
the  chances  of  his  increasing  the  price  by  the  whole  tax. 

The  vahdity  of  this  statement  may  be  seen  from  a  reductio 
ad  absurdum  of  the  opposite.  Suppose  it  were  true  that,  the 
more  elastic  the  demand,  the  greater  the  chance  that  the 
monopolist  would  add  the  tax  to  the  price.  Then  it  would 
follow  that,  if  at  the  price  of  $6  the  demand  fell  off  to  500, 
the  net  profits  of  the  monopolist  would  be  (6  —  3)  x  500 
=  $1500;  if  to  400,  then  (6  —  3)  x  400=  $1200;  if  to  300, 
then  (6  —  3)  x  300=^900,  and  so  on.  In  other  words,  the 
monopolist  would,  in  each  case,  prefer  the  smaller  net  profits 
to  the   higher   ones  —  which    is    absurd.^     It   remains   true, 

1  Especially  because  the  proposition  has  recently  been  assailed,  again  by  Pro- 
fessor Edgeworth,  in  Ecottomic  Journal,  vii,  p.  227,  note  4,  and  in  his  criticism 
of  Professor  Graziani's  acceptance  of  the  above  contention  in  ibid.,  vii,  p.  406, 
and  viii,  pp.  237,  238.  For  Professor  Graziani's  rejoinder,  see  Sulla  Repercus- 
sione,  etc.,  pp.  6,  7.  See  also  Professor  Edgeworth's  answer  to  the  argument  in 
the  text  in  the  Economic  Journal,  ix,  pp.  302-306,  and  the  summary  by  Janna- 
cone,  op.  cit.,  pp.  16-21. 

2  The  contention  of  Professor  Edgeworth  depends  on  the  assumption  that  the 
demand  curve  is  continuous,  —  that,  if  an  increase  of  price  leads  to  such  a  sudden 
falling  off  in  demand,  a  decrease  of  price  will  lead  to  a  similar  jump  in  demand. 
But  this  does  not  necessarily  follow. 

In  the  Economic  Journal,  ix,  p.  307,  Professor  Edgeworth  concedes  that  his 
argument  rests  on  the  postulate  of  continuity,  which  he  thinks  is  true  "  in  general 
in  the  great  majority  of  cases  which  occur  in  ordinary  practice."     This  is,  how- 


Taxes  on  Profits  347 

therefore,  that  the  degree  to  which  the  tax  will  be  added  to 
the  price  varies,  other  things  being  equal,  inversely  with  the 
elasticity  of  the  demand. 

ever,  precisely  the  point  at  issue.  The  argument  in  the  text  is  designed  to  show 
that  the  regime  of  monopoly  may  differ  from  that  of  competition.  My  assumption 
is  that  of  a  demand  which  becomes  more  or  less  elastic  after  the  point  of  maxi- 
mum monopoly  revenue  has  been  reached.  Professor  Edgeworth's  assumption 
is  that  of  a  demand  which  is  more  or  less  elastic  from  the  outset,  before  as  well 
as  after  this  point.  Professor  Edgeworth's  contention  that  my  assumption  is  illicit 
seems  to  be  quite  arbitrary. 

Professor  Jannacone  in  reviewing  the  controversy  in  his  Questioni  Controverse, 
pp.  17-18,  explains  very  clearly  the  exact  nature  of  the  point  at  issue.  He  says: 
"  However  inelastic  the  demand,  the  increase  of  price  always  finds  a  limit  in  the 
amount  of  income  which  the  marginal  purchasers  are  willing  to  sacrifice.  The 
less  elastic  the  initial  demand,  the  more  easily  will  the  price  reach  a  limit  beyond 
which  the  demand  will  fall  to  zero.  Hence  if  the  demand  for  a  monopolized 
article  is  inelastic,  the  monopolist  will  force  the  price  almost  up  to  the  price  limit, 
and  if  a  tax  is  imposed  the  monopolist  will  raise  the  price  only  slightly  because 
of  the  lessening  of  the  margin  between  the  new  price  and  the  price  limit.  .  .  . 
This  lessening  of  the  margin,  however,  can  mean  only  that  an  originally  inelastic 
demand  acquires  an  enormous  elasticity  as  soon  as  the  price  reaches  a  certain 
point.  It  is  hence  this  enormous  elasticity  of  the  demand  at  a  given  point,  and 
not  the  initial  inelasticity,  which  is  the  true  cause  of  the  difficulty  experienced  by 
the  monopolist  in  raising  the  price  after  the  imposition  of  the  tax  ;  for  the  initial 
inelasticity  influences  the  situation  only  in  so  far  as  it  hastens  the  attainment  of  a 
price  relatively  near  the  price  limit." 

"  Hence,  in  the  case  of  two  demands  in  each  of  which  the  maximum  monopoly- 
revenue  price  is  found  at  the  same  point,  but  where  after  this  point  the  one  case 
exhibits  a  greater,  and  the  other  a  smaller  elasticity,  the  increase  of  price  after 
the  imposition  of  a  tax  will  evidently  be  easier  in  the  case  of  the  more  inelastic 
demand.  For  this  flows  naturally  from  what  was  said  above;  namely,  that  in  the 
case  of  a  demand  which  is  more  elastic  after  the  point  of  maximum  monopoly 
revenue  has  been  reached,  the  margin  between  the  new  price  and  the  price  limit 
will  be  more  narrowed  than  in  the  case  of  a  less  elastic  demand." 

Professor  Edgeworth,  indeed,  almost  at  the  close  of  his  discussion,  in  correct- 
ing his  previous  statement,  now  thinks  that  it  is  impossible  by  mathematical 
reasoning  to  come  to  any  definite  conclusion  whatever  in  the  matter:  "In  any 
given  case  it  is  impossible  to  say  whether  the  increase  of  elasticity  conduces  to  the 
increase  or  the  decrease  of  the  efficacy  of  a  tax  to  raise  price,  unless  we  are  given 
the  curvature  of  the  demand  curve,  which  is  not,  I  think,  usually  given,  as  to  sign, 
much  less  with  the  quantitative  precision  which  would  often  be  necessary  for  the 
present  purpose."  —  Econ.  Journ.,  ix,  p.  312.  He  adds  (p.  313)  that  to  this  extent 
"  I  have  to  retract  my  original  statement."  He  still  thinks,  however,  that  my 
statement  in  the  text  {supra,  p.  345)  as  to  the  condition  of  the  consumer  is 
erroneous  "  if  the  situation  of  the  consumer  is  tested .  .  .  not  so  much  by  the  rise 


348  Shifting  and  Incidence  of  Taxation 

We  see  then  that  the  validity  of  the  general  law  as  stated 
above  ^  is  substantiated,  and  that  in  the  case  of  monopoly  the 
degree  to  which  the  price  will  be  increased  by  a  tax  depends 
upon  the  height  of  the  tax  as  compared  on  the  one  hand 
with  the  ratio  of  product  to  cost,  and  on  the  other  hand  with 
the  elasticity  of  the  demand. 

If  we  consider  the  ulterior  effects  of  a  tax  on  the  gross 
product  of  a  monopoly,  some  interesting  conclusions  force 
themselves  on  our  attention.  Let  us  take  up  those  cases  in 
which  the  monopolist  will  generally  add  the  tax  to  the  price. 
To  this  extent  he  will  have  shifted  the  tax  to  the  consumer  ; 
but  that  does  not  mean  that  he  suffers  no  loss.  On  the  con- 
tary,  since  the  increased  price  means  reduced  sales,  the  net 
profits  of  the  monopolist  will,  as  we  have  seen,  be  smaller 
than  before  the  tax.  He  therefore  loses  also.  The  tax  he 
pays  to  the  government  is,  indeed,  smaller  than  it  would  have 
been  if  he  had  continued  to  produce  as  much  as  before ;  and 
in  this  sense  we  can  speak  of  a  partial  evasion  of  the  tax. 
That  is,  taking  the  figures  used  above  in  the  illustration  of 
normal  conditions,  the  tax  of  $1  per  unit  amounts  to  $1000 
when  1000  units  are  sold  ;  but  since  the  change  of  price  from 
;^5  to  $6  cuts  down  the  sales  to  only  700  units,  the  govern- 
ment then  receives  only  $700.  The  producer  thus  evades 
the  tax  to  the  extent  of  ^300,  but  he  also  suffers  a  consider- 
able loss.  For,  while  his  net  profits  before  the  imposition  of 
the  tax  were  ^3000,  his  net  profits,  after  he  raises  the  price 
by  the  entire  amount  of  the  tax,  are  only  ;^2ioo.  He  thus 
loses  1^900,  although  he  technically  shifts  the  tax.  Moreover, 
the  consumers  also  lose.  Those  who  pay  the  increased  price 
can  measure  their  loss  in  dollars  and  cents  ;  for,  if  the  tax  is 
shifted  completely,  they  pay  the  total  amount  of  the  tax. 
Those  who  have  been  compelled,  by  the  increase  of  price,  to 
forego  the  article  and  to  content  themselves  with  something 
inferior,  also  suffer  a  loss,  even  though  it  cannot  be  definitely 

of  price  as  by  the  loss  of  consumer's  surplus."  As  my  argument,  however,  was 
addressed  precisely  to  this  question  of  the  rise  of  price,  the  objection  does  not 
seem  very  weighty.  i  Supra,  p.  342. 


Taxes  on  Profits 


349 


expressed.  The  only  persons  who  gain  are  the  producers  of 
the  new  commodity  which  some  of  the  consumers  now  sub- 
stitute for  the  old  one.  This  gain,  however,  which  also 
cannot  be  expressed  numerically,  will  ordinarily  be  smaller 
than  the  loss  suffered  by  the  producers  of  the  original  article. 
Even  though  a  tax  on  gross  product  be  shifted  to  the  con- 
sumer, in  the  sense  of  causing  a  rise  in  price,  it  is  apt  to 
inflict  a  loss  on  the  producer  as  well  as  on  the  consumer;  and 
this  loss  to  both  classes  may  exceed  the  total  yield  of  the  tax 
to  the  government.  In  the  above  extreme  case  the  pro- 
ducers lose  $900,  the  consumers,  whose  loss  can  be  computed 
numerically,  lose  ^700,  or  ;^i6oo  together,  while  the  tax 
yields  only  $700.  The  possible  dangers  of  taxes  on  gross 
product  are  thus  apparent.^ 

^  The  above  reasoning  may  be  illustrated  graphically  as  well  as  arithmetically. 
Fleeming  Jenkin,  "On  the  Principles  which  Regulate  the  Incidence  of  Taxes,"  in 
Proceedings  of  Royal  Society  of  Edinburgh,  Session  1871-1872,  p.  624  (republished 
in  Papers,  Literary,  Scientific,  etc.,  by  the  late  Fleeming  Jenkin,  edited  by  Colvin 
and  Ewing,  1887,  ii,  p.  113),  made  use  of  the  following  diagram  :  — 


M     M"M' 


FN  is  the  demand  curve,  PE  the  supply  curve,  CC  the  amount  of  tax  per 
unit.  Then  OM  is  the  market  price  to  the  supplier,  OM'  the  market  price  to  the 
buyer,  and  MM'  the  tax. 

The  amount  raised  by  the  tax  is  MCC'M',  the  portion  paid  by  the  seller 
CC"M"M,  the  portion  paid  by  the  buyer  C'C'M'M".  The  whole  loss  to  the 
community  is  MCDC'M',  the  loss  to  the  sellers  CDM"M,  the  loss  to  the  buyers 
M"DC'M'.  1>' ah  buyers  and  sellers  suffer  a  loss  beyond  the  tax.  The  sellers 
suffer  a  loss  Ct"D,  the  buyers  suffer  a  loss  C CD.  If  the  tax  is  large,  CC  will 
approach  the  axis  OX.  Then  the  tax  will  be  unproductive,  and  the  excess  of  loss 
to  buyers  and  sellers,  CC'D,  will  be  large. 

Of  course,  according  as  the  industry  obeys  the  law  of  constant  returns,  or  of 
increasing  returns,  the  supply  curve  PE  will  tend  to  curve  differently.  Conversely, 
according  to  the  elasticity  of  the  demand,  the  demand  curve  FN  will  tend  to  be 


350  Shifting  and  Incidence  of  Taxation 

The  case  of  a  bounty  is  just  the  reverse  of  a  tax.  It  can 
be  proved  in  the  same  way  that,  while  a  bounty  ordinarily 
benefits  only  the  producer  and  brings  no  advantage  to  the 
consumer,  cases  may  possibly  occur  where  the  result  of  a 
bounty  will  be  not  only  an  increase  of  the  profits  of  the 
producer,  but  also  a  decrease  of  the  cost  to  the  consumer. 
This  is  the  reason  why  bounties  have  generally  been  given  ; 
namely,  to  educate  the  producer  to  that  point  where  he  may 
find  it  profitable  to  reduce  prices.  But  these  instances  are 
very  exceptional,  just  as  was  the  preceding  case  of  a  tax 
that  cost  the  producer  and  the  consumer  far  more  than  it 
yields  to  the  government.  Such  cases,  moreover,  cannot  be 
advanced  as  arguments  in  favor  of  the  policy  of  bounties  in 
general ;  for,  ordinarily,  the  loss  occasioned  to  the  taxpayers 
who  pay  in  taxes  the  amount  distributed  as  a  bounty  more 
than  outweighs  the  benefits  to  the  special  classes  who  are 
deemed  to  derive  a  benefit  from  the  bounty.  It  is  for  this 
reason  that  modern  governments  grant  bounties  only  in  the 
exceptional  instances  mentioned  above. 

Returning  now  to  the  consideration  of  taxes  on  gross  prod- 
uct in  general,  irrespective  of  the  fact  whether  the  industry 
is  subject  to  the  law  of  monopoly  or  of  competition,  attention 
must  be  called  to  a  point  in  which  many  have  committed  a 
serious  error.  Cournot,  for  instance,  maintained  that  a  tax, 
whether  on  a  monopoly  or  on  a  competitive  commodity,  may 
raise  the  price  to  an  extent  greater  than  the  amount  of  the 
tax.  One  of  the  reasons  he  advanced  for  this  phenom- 
enon was  that  the  price  paid  by  the  consumer  must  include 
not  only  the  tax  but  the  interest  on  the  sum  necessary  to  pay 

parallel  to  EO.  Jenkin  did  not  modify  his  diagram  to  meet  these  conditions. 
But  Professor  Marshall  has  made  the  changes  in  his  Principles  of  Economics, 
3d  ed.,  pp.  523-525,  to  which  the  reader  is  referred.  Marshall,  however,  applied 
his  diagrams  only  to  consumers'  rent,  i.e.  to  what  Jenkin  called  C  C" D.  It  is 
equally  applicable  to  the  producers'  rent.  The  whole  analysis  is  outlined  by 
Cournot  in  his  Recherches  sur  les  Principes  Maihematiques  de  la  Theorie  des 
Richesses  (1838),  pp.  78-82  (English  translation,  pp.  71-75),  and  more  espe- 
cially in  his  Principes  de  la  Theorie  des  Richesses  (1863),  pp.  374-378. 


Taxes  on  Profits  351 

the  tax,  and  the  profits  of  the  middlemen.  The  necessary 
conclusion  was  that  it  is  always  wiser  to  assess  the  tax  at  as 
late  a  stage  as  possible  —  that  is,  on  the  consumer  himself  — 
since  the  collection  of  the  tax  becomes  more  costly,  more 
vexatious,  and  more  burdensome  to  the  community  in  propor- 
tion as  the  assessment  of  the  tax  approaches  the  producers. 
The  consumers  will  have  to  pay  more  than  the  government 
receives.^ 

This  theory  of  Cournot  is,  however,  nothing  but  the 
accepted  doctrine  of  Adam  Smith,  Ricardo  and  Mill  which 
they  took  from  the  earlier  writers  of  the  eighteenth  century. 
Several  of  these  authors  have  been  mentioned  above.^  The 
view  had  become  quite  common  by  the  time  of  a  writer  called 
Bricknock,  who  gives  the  phenomenon  the  name  of  super- 
taxation?  Adam  Smith  puts  the  idea  into  the  plainest  form 
when  he  says  :  — 

"  A  tax  upon  these  articles  (necessaries  of  life)  necessarily 
raises  their  price  somewhat  higher  than  the  amount  of  the 
tax,  because  the  dealer  who  advances  the  tax  must  generally 
get  it  back  with  a  profit.  His  employer,  if  he  is  a  manu- 
facturer, will  charge  upon  the  price  of  his  goods  this  rise 
of  wages,  together  with  a  profit ;  so  that  the  final  payment 
of  the  tax,  together  with  this  exchange,  will  fall  upon  the 

1  Cournot  argues  on  p.  78  of  the  Principes  Mathematiqttes  (English  translation, 
p.  70)  that,  owing  to  the  "  additional  charges  arising  from  interest,"  "  the  com- 
modity will  be  sold  at  a  higher  price  just  in  proportion  as  the  tax  is  prematurely 
collected."  Cf.  the  corresponding  statement  in  his  Principes  de  la  Theorie  des 
Kichesses,  p.  273,  as  to  competitive  conditions. 

2  See  supra,  pp.  29,  80,  102,  etc.  The  common  view  is  well  reflected 
in  The  Policy  of  the  Tax  upon  Retailers  considered;  or  a  Plan  in  favor  of  the 
Manufacturers,  London,  1786,  p.  29,  as  well  as  in  Thoughts  on  Capital  Taxa- 
tion :  in  the  course  of  which  the  policy  of  a  Tax  on  Incomes  is  impartially  investi- 
gated.    London,  1798,  p.  11. 

'  A  Treatise  upon  Perennial  Ways  and  Means,  with  other  Political  Tracts 
inscribed  to  the  King.  By  T.  Bricknock,  London,  1762,  p.  2.  It  is  worthy  of 
mention  that  the  author  first  suggested  the  use  of  stamps,  as  the  method  of  tax- 
ing commodities  when  on  the  way  to  the  hands  of  the  consumer  —  a  suggestion 
which  was  not  adopted  until  after  a  century  later  when  the  United  States  gov- 
ernment introduced  it  into  its  internal  revenue  system  at  the  instance  of  David  A. 
Wells.  —  Op.  cit.,  p.  7. 


352  Shifting  and  Incidence  of  Taxation 

consumer.  The  final  payment  of  both  the  one  and  the 
other  (taxes  on  necessaries  and  on  labor)  falls  altogether 
on  themselves  (the  consumers)  and  always  with  a  consider- 
able overcharge."  ^ 

So  also  this  is  what  Ricardo  means  when  he  says  that 
"  the  taxing  of  all  commodities  will  raise  the  price  by  a  sum 
at  least  equal  to  the  tax,"^  —  a  remark  which,  as  we  have 
seen,  is  not  necessarily  true.  Du  Puynode,  Parieu,  and 
many  other  writers  make  the  same  statement.  Fawcett 
goes  so  far  as  to  call  this  the  most  serious  objection  against 
taxes  on  commodities.^ 

The  excess-of-tax-above-price  theory  was  opposed,  shortly 
after  its  formulation  by  Adam  Smith,  by  Hamilton,  in  the 
work  mentioned  above.*  "It  is  by  no  means  a  new  opinion," 
says  Hamilton,  "  that  taxes,  in  passing  from  hand  to  hand, 
accumulate  like  a  snow-ball,  until  they  come  to  the  last 
payer."  ^  Hamilton,  on  the  other  hand,  maintains  that  "  taxes 
are  absorbed  by  the  improvement,"  that  "they  cannot  be 
accumulated,"  but  that,  on  the  contrary,  "  taxes  become  lighter, 
in  proportion  to  the  number  of  hands  through  which  they 
pass,  in  a  thriving  society."® 

Hamilton,  however,  did  not  approach  the  subject  from  the 
modern  point  of  view.  The  whole  excess-of-tax-above-price 
theory  rests  on  the  old  doctrine  of  normal  or  natural  profits. 
As  soon  as  we  remember  that,  according  to  the  modern 
theory,  actual  profits  are  simply  the  surplus  over  marginal 
cost,  the  doctrine  falls  to  the  ground.     The  middleman  can- 

^  Wealth  of  Nations,  book  v,  chap,  ii  (Rogers'  ed.,  ii,  pp.  468-470). 

^  Principles  of  Political  Economy  and  Taxation,  chap,  xvii  (McCulloch's  ed. 
p.  186).      Cf  Mill,  Principles,  book  v,  chap  iv,  §  2. 

^  Du  Puynode,  De  la  Monnaie,  du  Credit  et  de  F Impot,  ii,  p.  210  ;  Parieu, 
Traite  des  Impbts,  i,  p.  165  ;  Sayer,  The  Income  Tax,  1833,  pp.  58,  59  ;  Fawcett, 
Political  Economy,  pp.  550,  551  (6th  ed.).  A  recent  repetition  of  the  statement 
is  by  Sidney  and  Beatrice  Webb  in  their  Industrial  Democracy,  1898,  p.  303. 
"At  every  'repercussion'  of  the  tax,  there  would  be  an  additional  'loading,'  so 
that  the  ultimate  charge  to  the  consumer  would,  as  in  the  case  of  excise  duties  on 
raw  materials,  far  exceed  the  original  sum." 

*  An  Enquiry  into  the  Principles  of  Taxation,  1790.     Supra,  p.  155. 

^  Op.  cit.,  p.  145.  6  op.  cit.,  pp.  159,  190. 


Taxes  on  Profits  353 

not  add  his  profits  to  the  price,  because  in  a  state  of  competi- 
tion price  is  fixed  at  any  given  moment  at  the  cost  of  the 
most  expensive  increment.  If  there  were  such  a  thing 
as  normal  profits,  the  price  of  the  article  would  indeed  be 
increased  with  each  transfer,  until  the  ultimate  price  might 
immensely  exceed  the  tax.  But  under  competitive  conditions, 
there  is  always  a  producer  or  middleman  on  the  margin  of 
production  —  that  is,  one  who  produces  or  handles  the  prod- 
uct without  profits,  simply  getting  back  his  expenses  — 
and  the  price  of  the  whole  supply,  at  any  given  moment,  is 
equal  to  his  cost  of  doing  the  business.  The  profits  are 
obtained  only  by  the  more  fortunate  or  more  skilful  indi- 
viduals. The  mere  fact  that  the  product  passes  through  a 
number  of  hands  cannot  in  itself  raise  the  price  by  more 
than  the  exact  cost  of  such  transference.  Cost,  however, 
does  not  include  profits ;  cost  is  the  condition  of  profit. 
Otherwise  retail  prices  would  increase  geometrically,  accord- 
ing to  the  number  of  retailers  —  a  conclusion  which  is  obvi- 
ously untrue.  The  tax  is  simply  an  addition  to  the  cost  of 
production  ;  and  there  can  be  no  geometrical  increase  in  the 
tax.  As  soon  as  we  abandon  the  normal-profits  theory,  then, 
we  see  how  inaccurate  is  the  excess-of-price-above-tax  doc- 
trine. The  doctrine  assumes  not  only  that  the  producer  is  a 
monopolist,  but  that  every  middleman  is  a  monopolist  also. 
Only  on  this  assumption  can  there  be  a  no-profits  middle- 
man. The  assumption,  however,  is  not  practicable  in  treating 
of  the  conditions  of  actual  life.^ 

It  might  indeed  be  claimed  that  even  though  profits  are 
not  a  part  of  cost,  interest  is,  and  that  the  excess-of -tax-above- 
price  doctrine  is  still  valid  in  this  modified  sense,  as  far  as 
interest  is  concerned.  This  may  be  conceded,  but  the 
practical  effect  is  so  insignificant  that  the  theory  is  virtually 
robbed  of  all  its  vitality.  For  the  interest  is  charged  only  on 
the  amount  of  the  tax,  and  for  the  short  period  which  elapses 
between  each  successive  transfer.      When  the  tax  is  only  a 

^  Cf.  Gunton,  Principles  of  Social  Economics,  p.  380.  His  conclusions  are  in 
other  respects,  however,  questionable. 


354  Shifting  and  htcidence  of  Taxation 

fraction  of  the  original  selling  price,  the  interest  for  the 
elapsing  interval  becomes  the  merest  fraction  of  a  fraction, 
and  is  practically  negligible.^ 

There  is,  indeed,  one  way  in  which  the  price  of  an  article 
may  be  driven  up  beyond  the  amount  of  the  tax  —  a  way 
suggested  in  the  last  sentence,  but  involving  considerations 
very  different  from  those  just  discussed.  Since  a  tax  on 
production  or  on  commodities  must  generally  be  advanced 
before  the  producer  has  received  payment  for  his  sales,  the 
necessity  of  raising  the  funds  will  bear  more  heavily  on  the 
smaller  producers.  In  fact,  under  given  conditions  of  elas- 
ticity of  demand,  such  a  tax,  especially  if  it  be  high,  tends 
to  increase  the  advantages  of  the  powerful  producer.  When 
the  conditions  are  sufficiently  favorable,  the  imposition  of  a 
tax  may  thus  be  the  direct  cause  of  the  creation  of  monopoly. 
But  it  is  then  primarily  the  monopoly,  and  only  indirectly 
the  tax,  which  enables  the  producer  to  raise  the  price  far 
above  its  previous  level.  Conversely,  the  repeal  of  a  tax  may 
reduce  the  price  by  an  amount  far  greater  than  the  tax, 
because  what  was  formerly  a  monopoly  may  now  become 
subject  to  competition.  As  a  good  example  of  this  tendency 
may  be  mentioned  the  tax  on  matches  in  the  United  States 
during  the  Civil  War,  the  imposition  of  which  created  a 
monopoly  with  high  prices,  and  the  abolition  of  which  caused 
a  fall  in  price  considerably  greater  than  the  amount  of  the 
tax.  But  it  is  primarily  because  of  the  monopoly,  and  only 
indirectly  because  of  the  tax,  that  prices  are  thus  raised 
unduly.^ 

1  This  is  overlooked  by  William  Frend,  Principles  of  Taxation,  London,  1 799, 
p.  16,  who  limits  the  theory  to  the  case  of  interest.  Cf.  his  later  work,  which  is 
more  than  a  new  edition,  entitled  Principles  of  Taxation  or  Contribution  accord- 
ing to  Means,  London,  1804,  pp.  43-44. 

2  There  is  another  case  in  which  a  tax  may  increase  the  price  of  a  commodity 
by  more  than  the  amount  of  the  tax.  This  is  the  case  where  a  smaller  tax  is 
imposed  on  the  producer  of  a  larger  quantity  of  units  than  on  the  producer  of  a 
smaller  quantity.  In  industrial  operations  in  general  such  a  tax  is  well-nigh 
unknown.  It  would  be  what  the  French  call  an  "  upside  down  progressive  tax." 
But  in  agriculture  it  has  happened  that  a  uniform  tax  is  imposed  per  acre,  while 


Taxes  on  Profits  355 

The  whole  question  of  the  incidence  of  import  or  export 
duties  is  virtually  identical  with  the  one  discussed  in  the 
preceding  cases ;  for  import  and  export  duties  are  usually 
levied  at  given  rates  per  units  of  the  commodities,  whether 
the  units  be  those  of  weight  or  of  value ;  that  is,  whether 
the  rate  be  specific  or  ad  valorem.  It  will  be  readily  seen, 
therefore,  how  erroneous  is  the  doctrine  of  those  extremists 
who  maintain  that  the  loss  to  the  consumer  is  always  and 
necessarily  measured  by  the  proceeds  of  the  import  duties. 
On  the  contrary,  it  may  happen  that  prices  will  rise  by  some- 
thing less  than  the  tax ;  and  it  is  conceivable,  although  not 
probable,  that  prices  may  not  rise  at  all.  When,  for  example, 
the  foreign  producer  fears  that  the  increase  of  price  by  the 
total  amount  of  the  tax  will  so  materially  reduce  his  sales  as 
to  render  his  net  profits  lower  than  they  would  be  if  he 
assumed  a  part  of  the  tax  himself,  prices  may  rise  by  some- 
thing less  than  the  tax.  On  the  other  hand,  it  may  happen 
that  the  loss  to  the  consumer  will  be  more  than  the  amount 
of  the  tax.  It  is  impossible  to  lay  down  any  exact  and  uni- 
versal rule ;  attention  must  always  be  paid  to  the  given 
conditions  of  the  particular  case.  The  application  of  the 
principle  is  so  important,  however,  that  it  merits  a  fuller  dis- 
cussion, which  will  be  reserved  for  another  chapter.^ 

2.    A   Tax  on  Gross  Receipts 

A  tax  on  gross  receipts  must  not  be  confounded  with  a  tax 
on  sales  (in  the  sense  of  a  tax  proportional  to  the  number  of 
commodities  sold)  or  with  a  tax  on  gross  product.  A  tax  on 
sales  or  on  product  varies  with  the  amount  sold  or  produced. 
But  gross  receipts  may  be  larger  with  small  sales  than  with 
large  sales,  provided  prices  are  higher.     Conversely,  gross 

the  productivity  of  the  land  varies.  In  such  a  case,  the  tax  would  involve  a  lower 
rate,  per  bushel  of  wheat  for  instance,  on  the  more  productive  land  than  on  the 
less  fertile  land;  and,  as  long  as  the  less  fertile  land  contributed  a  part  of  the 
necessary  supply,  the  price  of  the  product  would  rise  by  more  than  the  amount 
of  the  tax.  The  case  is  worked  out  arithmetically  above  on  p.  260. 
^  Cf.  infra,  chap.  vii. 


356  Shifting  and  Incidence  of  Taxation 


receipts  may  be  smaller  with  large  sales  than  with  small 
sales,  provided  prices  are  lower. 

If  we  take  up  first  the  case  of  competition,  it  is  clear  that 
there  can  be  in  the  given  market  only  one  price  —  that  equiva- 
lent to  the  cost  of  production  of  the  dearest  increment  of  the 
temporary  supply.  Now  a  tax  on  gross  receipts  necessarily 
increases  the  expenses  of  this  dearest  increment ;  for  the  pro- 
ducer at  the  margin  of  profitable  production,  whose  gross 
receipts  afford  him  only  a  bare  return  for  his  outlay,  without 
any  profits,  must  add  the  tax  to  his  price,  if  he  is  to  remain 
as  a  competitor  at  all.  In  the  end,  therefore,  the  tax  must  be 
shifted.  The  extent,  however,  to  which  the  tax  will  be  shifted 
at  any  particular  time  will  depend  on  the  considerations  that 
were  discussed  in  the  case  of  a  tax  on  gross  product ;  that  is, 
on  the  elasticity  of  the  demand  as  compared  with  the  elas- 
ticity of  the  supply. 

In  the  case  of  monopoly  the  same  effects  are  also  generally 
observable.  Although  the  increase  of  price  will  lead  to  a 
falling  off  in  the  demand,  and  although  the  gross  receipts 
may  even  be  less  than  before,  the  net  profits  of  the  monopo- 
list will  generally  be  greater,  because  of  the  diminution  of 
the  expenses  due  to  the  decrease  of  the  output,  and  because 
the  tax  on  the  reduced  gross  receipts  will  be  less  than  it 
would  have  been  had  the  sales  remained  unchanged.^ 

S 


V 


N     M 


1  This  general  shift- 
ing of  the  tax,  in  whole 
or  in  part,  can  be  illus- 
trated by  a  diagram. 

At  price  OTlet  OM 
be  sold  ;  at  price  OT' 
let  ON  be  sold. 

Let  gross  receipts 
O  T CM  =  Uo,ooo;  let 
gross  receipts  OT' C N 
-  ^8990.  (These  fig- 
ures are  chosen  because 
they  were  the  ones  used 
in  the  first  edition,  in  the 


illustration  which  is  discarded  here  for  the  reasons  mentioned  in  the  next  note.) 
Let  PP  =  line  of  cost.    Let  cost  OPVM=  ;?7ooo.    Let  cost  OPVN  =  ;g6ooo. 


Taxes  on  Profits  'i)Sl 

Although  it  is  generally  true  that  a  tax  on  monopoly  gross 
receipts  will  raise  prices,  the  conclusion  does  not  necessarily 
follow.^  Cases  may  arise  where  it  will  be  profitable  for  the 
monopolist  to  bear  the  burden  himself.  The  reasoning  as 
illustrated  by  the  diagram  in  the  note  assumes  that  the  falling 
off  of  demand  with  increase  of  price  is  not  only  continuous, 
but  absolutely  proportional,  and  that  therefore  the  demand 
curve  may  be  represented  by  a  straight  line.  But  it  is  pos- 
sible that  the  demand  may  fall  off  largely  for  the  initial  incre- 
ments of  price,  and  less  largely  thereafter.  Let  us  utilize,  in 
other  words,  a  hypothesis  similar  to  the  one  already  men- 
tioned,^  where,  instead  of  the  demand  falHng  off  by  lOO  units 
for  every  one-quarter  of  a  dollar  added  to  the  price,  the 
demand  at  price  $^  amounts  to  looo;  at  price  $^\,  to  900; 
at  price  $5|-,  to  825  ;  at  price  $5|,  to  750;  and  at  price  $6,  to 
700.  If  a  tax  of  ten  per  cent  on  gross  receipts  be  now  im- 
posed, the  figures  will  be  as  follows  :  — 


At  Price 

Gross  receipts                 lo  %  tax 

$5       •     • 

•     S    X 

$1000  =  $5000       $500 

Si    •     • 

•     Six 

900  =    4725         472.50 

l\    ■     ■ 

•    Sh  X 

825  =    4537-50    453-75 

51    .    • 

•     Sfx 

750=    4312.50    431-25 

6      .     . 

.    6    X 

700  =    4200         420 

Then  net  receipts  at  price  OT  =  ;jSio,ooo  —  ^7000  =  $3000.  Then  net  receipts  at 
price  O  7^  =  ^8990  —  $6000  =  ^2990.    The  monopolist,  then,  will  prefer  price  6'/'. 

Now  impose  a  tax  of  one  per  cent  on  gross  receipts.  With  gross  receipts 
^10,000,  tax  =  $100.  With  gross  receipts  jgSggo,  tax  =  ^89.90.  Net  receipts 
;g3000  —  $100  =  ^2900  ;  net  receipts  ^2990  —  $89.90  =  $2900.10.  The  monopo- 
list will  now  prefer  the  price  OT'. 

Hence,  after  the  imposition  of  a  tax  on  gross  receipts,  the  monopolist  will 
prefer  to  raise  the  price.  Here,  as  before,  however,  allowance  must  be  made 
for  the  elasticity  of  demand  and  for  the  ratio  of  product  to  cost. 

1  In  the  first  edition  of  this  work  the  statement  was  made  that  such  a  tax  could 
never  raise  price.  This  was  an  error,  due  to  inattention,  in  the  particular  illus- 
tration, to  the  fact  that  cost  changes  with  the  amount  produced.  The  error  in 
the  original  calculation  has  been  pointed  out  by  several  writers,  for  example,  by 
Professor  Ross  in  the  Annals  of  the  American  Academy  of  Political  and  Social 
Science,  iii,  p.  460  ;  by  Knut  Wicksell  in  his  Finanztheoretische  Untersuchungen, 
p.  14  ;  and  finally  by  Professor  Edgeworth  in  the  Economic  Journal,  vii,  p.  228. 
But  some  of  them,  like  the  writer  last  named,  go  too  far  in  asserting  that  a  tax  on 
monopoly  gross  receipts  must  raise  prices.  2  Supra,  pp.  344,  345, 


358  Shifting  and  Incidence  of  Taxation 


The  expenses  will  be  the  cost  of  production  plus  the  tax,  or 

Cost  of  production        plus  tax   equals  total  expenses 
2  X  $1000  =  $2000  +  $500  =  $2500 

900  =  1800  +  472.50 
825=  1650+  453.75 
750=     1500+     431-25 


At  Price 

$5 
Si 
S\ 
5f 
6 


2  X 

2  X 

2  X 

2  X 


700 


1400  +     420 


=  2272.50 

=  2103.75 

=  1931-25 

=  1820 


Deducting  from  gross  receipts  the  total  expenses,  we  have 
the  net  profits  :  — 

At  Price  Gross  receipts  minus  expenses   equal  net  profits 

$5 
5i 
5i 
51 
6 

That  is,  the  maximum  monopoly  revenue  will  as  before  still 
be  at  price  ;^5. 

It  is,  therefore,  possible,  in  the  case  of  a  tax  on  gross 
receipts  as  well  as  in  the  case  of  a  tax  on  each  article  sold, 
that  the  monopolist  may  prefer  not  to  raise  the  price  at  all. 


$5000 

—  $2500 

=  $2500 

4725 

—  2272.50 

=  2452.50 

4537-50 

-  2103.75 

=  2433.75 

4312.50 

-  1931-25 

=  2381.25 

4200 

-  1820 

=  2380 

3.    A    Tax  on  Net  Receipts  or  Profits 

In  the  case  of  a  tax  on  the  net  profits  of  a  monopolist,  it 
might  be  assumed  that  the  tax  will  always  be  shifted  to  the 
consumer  because  of  his  necessary  dependence  on  the  mo- 
nopolist. This  assumption,  however,  would  be  completely 
false.  It  makes  no  difference  whether  the  monopolized 
commodity  is  one,  the  supply  of  which  is  strictly  limited 
and  which  is  not  reproducible  at  all,  or  whether  the  com- 
modity is  reproducible  according  to  the  law  of  constant, 
diminishing  or  increasing  returns.  So  far  as  the  producer 
is  concerned,  he  cannot  add  the  tax  to  the  price ;  for  it  may 
be  assumed  that  the  monopolist  producer  will  always  demand 
the  highest  price  which  the  consumer  is  willing  to  give.  If 
the  consumers  were  willing  to  pay  more,  he  would  have 
increased  the  price  before  the  imposition  of  the  tax.  In 
other  words,  since  monopoly  price  is  always  at  the  point 


Taxes  on  Profits  359 

of  greatest  monopoly  profits,  a  tax  on  these  profits  can  never 
increase  the  price.  A  tax  on  monopoly  profits  must,  there- 
fore, fall  wholly  on  the  monopolist. 

In  the  case  of  competitive  net  receipts,  we  must  distin- 
guish between  an  exclusive  and  a  general  tax  on  profits. 
A  tax  on  the  profits  of  some  particular  occupation  must,  in 
the  long  run,  be  shifted  to  the  consumer,  provided  that  the 
commodity  continue  to  be  produced  at  all.  For  if  the  tax 
rests  on  the  particular  profits,  the  producers  will  be  put  at 
a  disadvantage  as  compared  with  those  engaged  in  other 
industries.  There  will  .be  a  gradual  migration  of  capital  to 
find  the  most  profitable  level,  and  the  original  industry  will 
gradually  be  deserted.  In  the  long  run,  therefore,  either  the 
tax  will  be  shifted  to  the  consumer  or  it  will  lead  to  a  ces- 
sation of  production.  In  the  one  case,  consumers  suffer 
through  increase  of  price ;  in  the  other  case,  they  suffer 
through  destruction  of  consumption.  But  in  no  case  will  the 
burden  ultimately  rest  on  the  permanent  producer. 

We  must,  however,  not  forget  the  following  important 
practical  point,  which  seems  to  have  been  overlooked  by 
many.  To  the  extent  that  the  theory  of  the  mobility  of 
capital  is  not  applicable,  "the  long  run"  will  not  occur. 
When  the  fixed  capital  forms  a  large  part,  and  the  circulat- 
ing capital  a  small  part,  of  the  entire  investment,  final  equi- 
librium can  be  brought  about  only  through  the  ruin  and 
disappearance  of  the  producer.  Even  where  the  capital  is 
ultimately  transferred,  the  intermediate  effects  are  often  the 
most  important  ones.  What  may  be  in  a  sense  unimportant 
from  the  standpoint  of  national  economy,  may  be  supremely 
important  from  the  standpoint  of  individual  economy.  When 
we  say  that  taxes  cannot,  in  the  long  run,  remain  on  the 
producer,  we  generalize  the  conception.  The  producer 
merely  represents  a  class  of  individuals  who  never  disappear. 
But  when  we  speak  of  the  producers  during  any  interval,  we 
refer  to  certain  individuals.  The  welfare  of  producers  as  a 
class  is  something  very  different  from  the  welfare  of  an  actual 
producer.     Producers  as  a  class  ultimately  may  contrive  to 


360  Shifting  and  Incidence  of  Taxation 

obtain  certain  average  returns  ;  but  this  may  be  rendered 
possible  only  by  the  complete  ruin  of  the  individuals  who  are 
now  engaged  in  production.  So  far  as  inequalities  of  taxation 
are  not  constant  inequalities,  this  process  will  continually 
repeat  itself.  The  optimistic  theory  is  as  much  out  of  place 
here  as  it  is  in  the  other  domains  of  economic  science.^  In 
other  words,  even  an  exclusive  tax  on  profits  may  at  any  given 
time,  under  certain  conditions,  rest  on  the  original  taxpayer 
until  he  has  been  entirely  driven  out  of  the  field.  The  only 
result  of  a  tax  on  profits  might  then  be  completely  to  stop  the 
production  of  the  commodity  or  the  continuance  of  the  business. 
The  consumer  would  then  suffer  not  through  the  increase  of 
price,  but  through  the  inability  to  procure  the  commodity  at  all. 
As  an  actual  fact  many  of  the  so-called  taxes  on  business  or 
on  corporations  are  in  the  nature  of  special  or  exclusive  taxes. 
Thus  in  the  United  States  not  only  are  the  corporation  taxes 
in  many  cases  imposed  on  only  special  classes  of  corporations, 
but  various  classes  of  business  like  banks  are  often  assessed 

^  Cf.  supra,  p.  271,  the  discussion  of  the  incidence  of  the  tax  on  the  net  profits 
of  land.  The  qualification  to  the  general  doctrine  as  to  the  incidence  of  exclusive 
taxes  is  admirably  expressed  by  Cliffe- Leslie  in  the  following  passage  :  "  Another 
incidence  of  a  number  of  taxes  on  the  working  classes  as  producers  has  been  con- 
cealed by  the  doctrine  that  taxes  on  particular  commodities  and  particular  em- 
ployments fall  on  consumers  only,  not  on  producers.  The  theory  of  taxation 
abounds  in  examples  of  the  danger  of  the  abstract  and  hypothetical  method  of 
reasoning  in  economics.  The  economist  sets  out  with  an  assumption  surrounded 
with  conditions  and  qualifications,  and  perhaps  itself  open  to  question,  such  as 
that  in  the  long  run,  and  on  the  average,  the  profits  of  different  occupations  tend 
to  equality,  and  presently  forgetting  all  his  qualifications  and  conditions,  con- 
cludes that  the  profits  of  individuals  must  be  equal;  and  therefore  all  special  taxes 
advanced  by  producers  must  come  back  to  them  with  equal  or  average  profit. 
Individual  profits  really,  in  almost  every  business,  vary  from  enormous  gain  to 
absolute  loss.  Mill  says  :  'That  equal  capitals  give  equal  profits,  as  a  general 
maxim  of  trade,  would  be  as  false  as  that  equal  age  and  size  give  equal  bodily 
strength.'  Nevertheless  it  is  taken  for  granted  that  every  special  tax  on  a  busi- 
ness is  received  '  with  average  profit,'  though  the  net  result  of  all  a  trader's 
advances  is  not  unfrequently  ruin  ;  though  all  such  taxes  give  an  advantage  to  the 
larger  capitalists.  .  .  ."  —  "The  Incidence  of  Imperial  and  Local  Taxation  on  the 
Working  Classes."  In  Essays  on  Moral  and  Political  Philosophy,  1879,  p.  196. 
In  the  2d  ed.,  under  the  title  Essays  in  Political  Economy,  this  passage  is  found 
on  pp.  388,  389. 


Taxes  on  Profits  361 

to  the  general  property  tax  in  what  virtually  amounts  to  a 
special  form  of  taxation. 

When  we  have  such  forms  of  special  taxation  it  is  to  be 
noted  that  the  effects  of  the  tax  may  vary  with  the  particular 
way  in  which  it  is  assessed.  Thus  when  special  taxes  are 
levied  on  the  profits  of  banks,  the  tax  will  ordinarily  be  shifted 
to  the  consumer  in  the  shape  of  a  higher  charge  for  transact- 
ing the  business,  that  is,  in  this  particular  case,  by  a  rise  in 
the  rate  of  interest,  with  all  the  ulterior  consequences  to  the 
whole  of  the  community  which  flow  from  an  increase  in  the 
price  of  capital.  Where,  on  the  contrary,  the  tax  on  banks 
assumes  the  form,  as  in  many  of  the  American  states,  of  a 
special  tax  on  bank  shares,  the  bank  deducting  the  tax  from 
the  dividends,  the  tax  really  becomes  one  on  particular  forms 
of  property  rather  than  of  business.  The  result  will  be  a 
capitalization  of  the  tax,  with  a  corresponding  reduction  in  the 
value  of  the  shares.  Here  then  the  tax  will  not  be  shifted, 
but  capitalized. 

In  some  instances,  again,  the  owners  are  the  consumers,  as 
in  the  case  of  mutual  insurance  companies.  When  a  special 
tax  is  laid  on  insurance  companies,  as  is  generally  true  in  the 
United  States,  there  can  be  no  question  but  that  the  tax  results 
in  a  diminution  of  the  dividends  on  the  insurance  policies,  thus 
contributing  to  a  decrease  in  the  habits  of  thrift  and  foresight. 
Instead  of  taxing  profits  or  capital,  as  is  the  ostensible  aim  of 
the  law,  the  real  consequence  is  to  tax  expenditure,  and  that 
too  a  particular  kind  of  expenditure,  which  is  in  almost  all 
other  countries  deemed  worthy  of  the  special  solicitude  of  the 
government. 

Other  examples  of  special  taxes  on  business  profits  leading 
to  the  reverse  of  what  was  originally  anticipated  will  readily 
occur.  A  good  instance  is  afforded  by  the  tax  on  department 
stores,  such  as  was  imposed  in  the  state  of  Missouri  and  in 
some  of  the  German  states.  In  Prussia  the  consequences 
have  been   carefully   studied.^     There  the  tax  in   question, 

^  See  Hans  Gehrig,  Die  Warenhaussteuer  in  Preussen.  Ein  Beitrag  zur 
iaufmdnnischen  MitUlstandspolitik,  1905,  pp.  65-72. 


362  Shifting  and  Incidence  of  Taxation 

instead  of  resting  on  and  repressing  the  department 
stores  and  thus  developing  the  smaller  shops,  as  was  in- 
tended, had  just  the  contrary  effect.  The  tax  was  high 
enough  to  prevent  new  department  stores  of  moderate  size 
from  being  erected,  and  thus  enabled  the  existing  stores  to 
increase  their  control  of  the  market.  Similar  instances  of 
the  misdirected  efforts  of  the  taxing  power  might  easily  be 
mentioned. 

A  general  or  universal  tax  on  profits,  in  the  sense  of  a 
uniform  tax  on  profits,  does  not,  strictly  speaking,  exist  any 
more  than  a  general  or  uniform  tax  on  all  capital.^  But  a 
tax  may  practically  affect  so  many  classes  of  producers  in 
a  given  community,  and  so  many  different  kinds  of  profits 
more  or  less  removed  from  liability  to  competition  from  for- 
eign sources,  that  we  are  justified  in  setting  up  the  conception 
of  a  general  tax,  in  contrast  with  an  exclusive  tax,  on  profits. 
Such  a  general  tax  on  net  profits  can  never  be  shifted.  If 
profits  represent  the  surplus  above  cost  of  production,  a  gen- 
eral tax  on  this  surplus  cannot  influence  the  cost  of  pro- 
duction. Price  cannot  be  altered,  and  the  interests  of  the 
consumer  cannot  be  affected.  It  is  the  producer  who  bears 
the  tax,  both  immediately  and  ultimately.^ 

1  See  supra,  p.  326. 

2  It  has  sometimes  been  asserted  that  in  a  "  seller's  market "  during  a  period 
of  rapidly  rising  prices  owing  to  trade  expansion  or  credit  inflation,  as  during  the 
Great  War,  even  a  general  tax  on  profits,  like  the  excess  profits  taxes  in  Europe 
and  America,  and  the  corporate  income  tax  in  the  United  States,  is  apt  to  be 
shifted  in  whole  or  in  part.  It  is  more  than  probable,  however,  that  the  tax  was 
the  excuse  for,  rather  than  the  cause  of,  the  higher  prices  which  were  due  in  the 
main  to  entirely  different  reasons.  Cf.  R.  M.  Haig,  "The  Taxation  of  Excess 
Profits  in  Great  Britain,"  American  Economic  Review,  Supplement,  1920,  pp.  155- 
157;  and  David  Friday,  "Prices  and  Excess  Profits  Taxes,"  Annals  of  the  Ameri- 
can Academy  of  Political  and  Social  Science,  vol.  89,  1920,  163-169,  and  Wages, 
Profits,  and  Prices,  1920,  ch.  xii. 

The  Italian,  Jarach,  thinks  that  under  certain  conditions  affecting  the  curve 
of  productivity  of  investment  on  the  one  hand  and  the  cost  of  saving  on  the 
other,  even  a  general  tax  on  profits  can  be  shifted.  By  that,  however,  he  seems 
to  mean  that  the  general  effects  on  both  producers  and  consumers  may  be  altered. 
See  Cesare  Jarach,  "  Gli  effetti  di  una  imposta  generale  ed  uniforme  sui  profitti  " 
in  Atti  delta  Reale  Accademia  delle  Scienze  di  Torino,  xlvi  (191 1),  pp.  28  et  seq. 


Taxes  on  Profits  363 

Some  writers,  indeed,  like  Cournot,  have  asserted  that  the 
ultimate  effects  on  the  consumer  may  be  bad,  because  the  tax 
restricts  the  producers'  consumption,  and  because  the  em- 
ployment of  the  proceeds  of  the  tax  is  generally  less  profit- 
able than  if  the  proceeds  had  remained  in  the  hands  of  the 
producer.  But  this  reasoning  seems  to  be  defective.  It 
takes  for  granted  that  taxes  are  used  unproductively,  and  it 
leads  logically  to  the  aphorism  of  Say  that  the  best  taxation 
is  that  which  is  least  in  amount.  So  far  as  governmental 
expenditures  are  necessary  and  judicious,  they  are  useful 
and  productive ;  and  it  is  not  permissible  to  assume  that 
private  expenditure  is  more  beneficial  than  public  expendi- 
ture. Everything  depends  on  the  nature  of  the  expendi- 
ture, and  on  the  general  views  as  to  the  duty  and  limits 
of  governmental  activity.  To  say  that  a  tax  on  profits  is 
injurious  to  the  consumer  seems  to  involve  a  begging  of  the 
question.  The  whole  problem,  moreover,  is  not  peculiar  to 
a  tax  on  profits,  nor  is  it  any  longer  a  problem  of  inci- 
dence :  it  belongs  properly  to  the  wider  discussion  of  the 
general  influence  of  taxation. 

One  practical  inference  from  the  above  discussion  may  be 
used  in  connection  with  the  controversy  in  the  United  States 
as  to  whether  corporation  taxes  should  be  levied  on  gross  or 
on  net  receipts.  Whether  these  be  monopolies  or  not,  the 
a  priori  conclusion  in  favor  of  taxation  of  net  receipts  ^  is 
strengthened  by  the  results  of  this  discussion.  In  the 
particular  case  of  transportation  companies,  for  example, 
around  which  most  of  the  wordy  warfare  and  the  practical 
contest  have  waged,  it  is  more  likely  that  the  travellers 
and  shippers  will  feel  a  tax  on  gross  receipts  than  one  on 
net  receipts. 

4.    A    Tax  of  Fixed  Amount 

It  may  happen  that  a  tax  is  not  assessed  according  to  net 
profits,  gross  receipts  or  sales,  but  that  it  is  imposed  in  the 

1  See  Seligman,  Essays  in  Taxation,  gth  ed.,  1921,  pp.  258-270. 


364  Shifting  and  Incidence  of  Taxation 

shape  of  a  lump  sum  on  all  the  producers  in  the  industry. 
This  is  the  common,  although  not  the  universal,  rule  with 
the  American  license  taxes.  No  matter  how  large  the  prof- 
its, the  tax  remains  the  same. 

In  the  case  of  a  monopoly  such  a  tax  necessarily  falls  on 
the  monopoly  profits.  For  the  very  same  reasons  that  were 
advanced  above,  in  the  discussion  of  a  tax  on  monopoly 
net  receipts,  the  tax  cannot  be  shifted.  It  is  always  the 
monopoly  revenue  that  suffers. 

In  the  case  of  competition,  the  tax  of  fixed  amount  is  a 
condition  precedent  to  production.  It  might  be  inferred  that 
the  tax  would  therefore  be  an  addition  to  the  necessary  cost 
of  production,  which  must  be  shifted  to  the  consumer.  But 
this  is  not  the  case ;  for  such  a  tax  is  even  more  inimical  to 
the  small  producer  than  a  tax  on  gross  product.  As  the  large 
producer  will  pay  absolutely  no  more  than  his  small  competi- 
tor, he  will  prefer,  provided  the  commodities  are  reproducible 
to  any  extent,  to  assume  the  tax  and  to  recoup  himself  by 
capturing  the  customers  of  the  smaller  dealer.  The  minor 
producer  who  is  thus  unable  to  add  the  tax  to  the  price 
will  be  crowded  out  of  existence.  Thus  the  fixed  license 
tax,  when  high  enough  to  tempt  the  large  dealer,  tends 
to  be  borne  by  the  producer  —  until,  indeed,  the  gradual 
trend  toward  monopoly,  fostered  by  the  tax,  may  bring 
about  a  rise  of  price  and  thus  affect  the  interests  of  the  cus- 
tomer. Here  again,  however,  it  would  be  only  indirectly 
the  tax  that  would  cause  the  rise  of  price.  But  it  may 
frequently  happen  that  the  price  will  not  rise  at  all,  the  in- 
creased sales  of  the  fewer  producers  compensating  them  for 
the  tax  which  they  pay.  In  such  a  case,  the  incidence  of  the 
tax  may  in  a  certain  sense  be  declared  to  be  neither  on  the 
consumers  nor  on  the  producers  who  continue  to  produce 
permanently  after  the  imposition  of  the  tax ;  for  the  whole 
tax  may  be  discounted  and  borne  by  the  unfortunate  pro- 
ducers who  are  crowded  out  of  existence.  Thus  the  system 
of  high  liquor  licenses  does  not  necessarily  result  in  any 
increased  price  to  the  consumer.     Its  effect  may  be  a  dimi- 


Taxes  on  Profits  365 

nution  of  the  saloons  and  the  gradual  monopolization  of  the 
trade  in  the  hands  of  the  wealthier  individuals.  The  pro- 
ducer then  always  pays  this  tax ;  the  consumer  may  or  may 
not  be  affected  ultimately. 

When  the  so-called  "  license  taxes  "  are  not  fixed  in  amount, 
but  vary  with  gross  receipts  or  gross  produce  or  net  profits, 
their  incidence  is  governed  by  the  rules  laid  down  in  the  pre- 
ceding paragraphs.  The  word  "  Hcense  "  covers  a  multitude 
of  very  distinct  taxes. 

In  summing  up  the  preceding  discussion,  we  come  to  the 
following  conclusions :  the  incidence  of  a  tax  on  monopoly 
revenue  is  always  on  the  producer,  except  in  the  case  where 
the  tax  is  proportioned  to  the  amount  produced  or  sold,  in 
which  case  the  tax  is  ordinarily  shifted  in  whole  or  in  part, 
although  even  there,  under  certain  conditions,  the  tax  may  re- 
main on  the  monopolist  producer ;  a  general  tax  on  competi- 
tive profits,  whether  fixed  or  proportional  to  net  receipts,  rests 
on  the  producer;  a  special  tax  on  competitive  net  receipts 
is  ordinarily  shifted  to  the  consumer ;  and  a  roundabout  tax 
on  competitive  profits,  in  the  shape  of  a  tax  on  gross 
receipts  or  gross  produce,  may  or  may  not  be  shifted  to 
the  consumer — with  the  probability  that,  in  the  great  ma- 
jority of  cases,  the  whole,  or  almost  the  whole,  of  the  tax 
will  be  so  shifted. 

This  conclusion  may  not  be  satisfactory  to  the  sticklers  for 
over-precision  or  for  "natural  laws"  of  incidence.  But  it 
will  be  suflficient  to  show  the  delicacy  of  the  problem,  and  to 
prove  how  superficial  is  the  optimistic  or  general  diffusion 
theory. 

If  we  wish  to  draw  any  inferences  as  to  some  existing 
problems  in  the  United  States,  they  may  be  summarized  as 
follows :  — 

(i)  The  so-called  "business"  taxes  are  not  necessarily 
any  more  "  direct "  taxes  than  are  the  national  internal  reve- 
nue taxes. 

(2)  Taxes  on  pure  monopolies    should  not   be    levied    on 


366  Shifting  and  Incidence  of  Taxation 

gross  product  or  on  gross  receipts  if  it  is  desired  that  they 
should  remain  on  the  monopoly. 

(3)  Taxes  on  corporations  should  be  levied  on  net  receipts 
rather  than  on  gross  receipts  or  on  other  elements,  if  it  is  not 
intended  that  the  taxes  should  be  shifted  to  the  community. 

(4)  Business  taxes  in  general,  including  the  so-called 
license  taxes,  should  be  levied  according  to  net  receipts.^ 
The  so-called  license  taxes,  when  of  fixed  amount,  further 
the  trend  toward  monopoly ;  and  when  graduated  according 
to  sales  tend  to  be  shifted  to  the  consumer. 

(5)  Excise  or  internal  revenue  taxes,  when  levied  on  gross 
product,  are  apt  to  be  shifted  to  the  consumer.  But  the  degree 
to  which  they  will  be  shifted  depends  chiefly  on  three  points  : 
{a)  whether  the  business  is  of  a  monopolistic  or  of  a  competi- 
tive nature ;  {b)  whether  the  elasticity  of  demand  is  great  or 
small ;  and  if)  whether  the  relation  of  product  to  cost  is  con- 
stant or  not.  There  is  always  a  possibility  that  a  portion  of 
the  tax  may  rest  on  the  producer. 

The  application  of  the  general  principles  of  the  taxation 
of  profits  to  land,  houses,  debts  and  mortgages  has  already 
been  made  in  preceding  chapters,  and  needs  no  further 
discussion. 

1  One  of  the  few  inductive  studies  of  the  incidence  and  effects  of  the  tax  on 
corporate  profits  is  that  of  Dr.  Willibald  Mildschuh,  of  the  university  of  Prague, 
on  the  Austrian  bank  tax :  "  Ueber  die  Wirkungen  der  Erwerbsteuer  auf  die 
osterr.  Kreditbanken  und  Vorschusskassen "  in  the  Statistische  Monatschrift, 
1912,  pp.  151-241. 


CHAPTER   VI 
Taxes  on  Wages 

It  has  been  customary,  since  the  time  of  Adam  Smith,  to 
make  a  distinction  between  the  wages  of  ordinary  labor  and 
what  he  calls  "  the  recompense  of  ingenious  artists  and  men 
of  liberal  professions."  Let  us,  then,  first  take  up  the  inci- 
dence of  a  tax  on  the  latter  class. 

Adam  Smith  maintained  that  a  tax  on  such  skilled  employ- 
ments would  be  shifted,  because  this  recompense  "necessarily 
keeps  a  certain  proportion  to  the  emoluments  of  inferior 
trades."^  Unless  their  recompense  increased  by  the  amount 
of  the  tax,  these  professions,  "  being  no  longer  on  a  level 
with  other  trades,  would  be  so  much  deserted  that  they  would 
soon  return  to  that  level."  On  the  other  hand,  John  Stuart 
Mill  maintained  that  all  the  skilled  and  privileged  employ- 
ments are  taken  out  of  the  sphere  of  competition  by  a  natural 
or  conferred  monopoly,  and  that  a  tax  will  always  fall  on 
them,  because  they  have  no  means  of  relieving  themselves  at 
the  expense  of  any  other  class.^  Which  of  these  two  state- 
ments is  correct  ? 

It  would  seem  that  in  the  main  Mill  is  right,  although  his 
reasons  are  not  entirely  above  criticism.  It  is  true  that  the 
earnings  of  professionals  are  in  general  regulated  by  custom 
rather  than  by  competition.  For  a  large  class,  moreover,  the 
superior  earnings  must  be  regarded  in  the  light  of  what  Mar- 
shall terms  quasi-rents.  A  great  tenor,  an  eminent  surgeon 
or  a  famous  lawyer,  for  example,  will  not  receive  more  for 
their  services,  if  a  tax  be  imposed  on  the  class  to  which  they 
belong.    To  them  a  tax  simply  means  a  burden  which  cannot 

*  C/.  above,  p.  145.  ^  Mill,  Principles,  book  v,  chap,  iii,  §  4. 

367 


368  Shifting  and  Incidence  of  Taxation 

be  shifted.  If  the  tax  had  not  been  im20sed^_Uieir  earnings 
would  have  beerTthe  jame!  IMorebver,  the  whole  class  of 
professional  workers  is  inmany  respects  subject  to  influences 
of  a  more  or  less  uneconomic  kind.  Their  motives  are  fre- 
quently not  pecuniary,  but  rather  of  a  higher  nature.  An 
actor,  a  painter,  a  doctor,  a  lawyer,  often  adopts  his  profes- 
sion with  other  objects  in  view  than  simply  making  his  living 
or  obtaining  the  greatest  possible  income.  It  is  not  long 
since  the  recompense  to  certain  professional  classes,  like 
doctors,  was  regarded  as  a  gratuity,  not  as  a  legally  enforce- 
able due.  Even  if  we  regard  these  classes  from  the  purely 
economic  standpoint,  we  cannot  say  that  their  recompense 
bears  any  necessary  proportion  to  common  wages.  The 
earnings  of  the  liberal  professions  are  not  dependent  on  cost 
of  production.  It  is  only  by  a  perversion  of  words  and  of 
facts  that  we  can  consider  the  time  and  efforts  spent  in 
educating  a  member  of  a  profession  as  a  capital  which  must 
earn  interest.  In  fact,  the  present  alleged  overfilling  of  the 
professions  is  due  not  so  much  to  the  hope  of  greater  earn- 
ings as  to  the  compulsory  education  and  general  social  condi- 
tions of  modern  times.  The  forces  which  keep  the  price  of 
labor  in  general  at  a  certain  level  do  not  operate  with  equal 
effect  in  this  field.  The  price  of  labor  in  professional  occu- 
pations, in  short,  is  not  competitive,  but  is  either  customary 
or  monopolistic. 

Salaried  public  officials  belong  to  a  similar  category ;  for 
governmental  salaries  depend  primarily  on  the  relative  desir- 
ability of  governmental  service,  and  on  considerations  of 
imagined  political  expediency.  They  may  be  highest  in 
countries  where  the  usual  level  of  wages  is  lowest.  Even  if 
this  were  not  so,  it  would  be  hard  to  say  on  whom  a  tax  on 
official  salaries  could  be  shifted.  Surely  not  on  the  govern- 
ment, because  it  does  not  enter  the  market  as  a  producer ; 
nor  does  it  follow  ordinary  commercial  principles.  If  the 
tax  be  sufficiently  high  to  render  the  position  undesirable,  it 
may  result  in  less  efficient,  and  therefore  in  the  long  run 
more  expensive,  work.     The  community  at  large  will  suffer 


Taxes  on    Wages  369 

from  a  poor  civil  service.  But  the  tax,  as  such,  cannot  be 
shifted. 

When,  however,  we  come  to  the  ordinary  wages  of  the 
common  artisan,  whether  skilled  or  unskilled,  the  matter  is 
not  so  simple.  We  have  seen  that  the  older  theory  main- 
tains that  a  direct  tax  on  wages  falls  on  profits,  because 
wages  are  necessarily  fixed  by  the  cost  of  living,  or  the 
standard  of  life.  But,  in  the  course  of  our  sketch  of  the 
history  of  the  doctrine,  we  learned  some  of  the  objections 
made  to  this  theory.  These  may  be  summed  up  as 
follows :  — 

(i)  It  is  assumed  that  laborers  will  not  consent  to  accept  a 
reduction  in  their  standard  of  life.  This,  however,  is  largely  a 
question  of  power  between  the  wage-earner  and  the  employer. 
It  is  impossible  to  say  in  advance  who  will  win.  If  wages 
were  actually  fixed  by  the  bare  minimum  of  subsistence, 
then,  indeed,  a  tax  on  wages  would  necessarily  be  shifted. 
Although  Ricardo  was  not,  properly  speaking,  a  believer  in 
the  iron  law  of  wages,  he  makes  use  of  this  very  argument 
to  prove  his  point.  The  fact  is  that  wages  are  never  at  this 
point  of  bare  subsistence :  the  standard  of  life  is  always 
above  this  limit.  Between  this  limit  and  the  actual  standard 
of  wages  there  is  a  margin  on  which  a  tax  may  encroach. 
An  irruption  of  low-priced  immigrants,  other  things  being 
equal,  will  inevitably  lower  the  standard  of  life  and  the 
general  rate  of  wages.  So  also  a  tax  on  wages  which  will, 
at  first  at  all  events,  fall  on  the  laborer,  may  equally  well 
lower  his  standard  of  life,  by  making  it  impossible  for  him 
to  procure  the  conveniences  to  which  he  has  been  accustomed. 
The  wage-earner  will,  of  course,  strive  to  reimburse  himself 
by  demanding  higher  wages ;  but  there  is  no  reason  why  the 
employer  should  be  compelled  to  acquiesce.  If  that  were 
true,  no  reduction  of  wages  would  ever  be  possible,  because 
a  reduction  of  wages  always  implies  a  lowering  of  the  stand- 
ard of  life.  Whether  or  not  a  tax  on  wages  will  be  shifted 
on  profits,  even  in  "ttf5'~lZ5frg"furi,  depends  entirely  on  the 
relative  strength  of   the  labor   organizations  and  on   other 


370  Shifting  and  Incidence  of  Taxation 

conditions  which  may  compel  the  employer  to  pay  an 
increase  of  wages  equivalent  to  the  amount  of  the  tax. 
Whenever  such  conditions  are  not  present -7- and  they  are 
frequently  absent  —  the  tax  will  rest  on  the  wage-earner, 
and  trench  on  the  margin  above  the  bare  rate  of  subsistence, 
thus  keeping  down  the  standard  of  life. 

(2)    Even  granting  that  a  tax  on  wages  may  in  the  long 
run,  under  favorable  conditions,  be   shifted  to  profits,  in  the  i 
interval  the  burden  will  be  borne  by  the  laborer.     It  is  a  well-  1 
known  fact  that  in  a  general  rise  of  prices  the  price  of  labor  I 
is  always  the  last  to  respond  to  the  general  impulse.     This  I 
interval,  however,  may  become  more  or  less  permanent.     The 
longer  the   delay,   the   more    severe    is   the    suffering   that 
ensues,   and  the    greater  the    prospect  that   the  temporary 
diminution  of  the  consumers'  effective  demand  will  be  con- 
verted into  a  reduction  of  the  laborers'  standard  of  life.^ 

The  taxation  of  labor  results  in  a  vicious  circle.  The 
weaker  the  workman,  or  the  lower  his  general  standard  of 
life,  the  less  able  is  he  to  resist  the  attempts  of  the  employers 
to  reduce  his  wages  to  the  barest  minimum.  The  higher  his 
wages,  the  more  effective  is  his  power  of  resistance  and  com- 
pulsion, and  the  more  likely  is  he  to  secure  a  gradual  con- 
tinual advance  of  wages.  The  imposition  of  a  tax  on  wages 
thus  injures  the  workman  both  temporarily  and  permanently. 
It  reduces  his  standard  of  life,  and,  in  weakening  him,  it 
renders  less  easy  any  future  attempt  to  lift  himself  out  of 
his  impoverished  condition.  If  a  tax  on  wages  is  shifted  to 
profits  at  all,  it  is  only  after  a  long  and  fierce  struggle,  during 
which  the  laborer  may  suffer  materially,  and  as  a  result  of 
which  his  whole  morale  may  be  lowered.  Here  again  there 
is  no  place  for  either  optimism  or  absolutism  of  theory. 

1  An  early  discussion  of  the  effects  of  taxation  on  wages,  which  breaks  com- 
pletely with  the  older  doctrine,  is  Carl  T.  H.  Roesler,  Von  dem  Einfiuss  der 
Besteuerung  auf  den  Arbeitslohn,  Erlangen,  iS6o.  Roesler  characterizes  some  of 
Ricardo's  statements  as  "  monstrous." 


CHAPTER   VII 

Other  Taxes 

The  application  of  the  principles  which  govern  the  inci- 
dence of  taxation  to  the  other  taxes  that  have  not  yet  been 
treated  calls  for  but  little  discussion.  The  most  important 
of  the  remaining  taxes  are  as  follows:  — 

I.    Poll  Taxes 

A  poll  or  capitation  tax  is  clearly  not  susceptible  of  being 
shifted,  except  to  the  extent  that  it  falls  on  the  laborer. 
Even  then,  it  must  trench  upon  the  margin  between  the 
cost  of  subsistence  and  his  actual  standard  of  life  before 
the  conditions  under  which  the  shifting  may  take  place  will 
be  present.  The  possibility  of  shifting,  moreover,  as  has 
already  been  indicated,  is  not  by  any  means  the  same  thing 
as  the  actual  shifting  itself. 

2.    Inheritance  Taxes 

A  tax  on  inheritances  or  bequests  cannot  be  shifted,  for 
evidently  there  is  no  one  to  whom  it  could  be  transferred. 
The  ulterior  effects  of  which  some  writers  speak,  such  as  the 
influence  of  inheritance  taxes  on  the  accumulation  of  capital, 
do  not  really  illustrate  the  process  of  shifting.  They  are, 
moreover,  of  such  doubtful  validity  that  they  may  be 
neglected.^ 

'  Professor  Bastable  {Public  Finance,  2d  ed.,  p.  563),  for  example,  bases  his 
criticism  on  Ricardo's  view  that  such  taxes  fall  on  capital,  and  thinks  that  the 
whole  society  will  as  a  result  suffer  from  less  efficient  production.  For  a  criticism 
of  this  position,  see  West,  The  Inheritance  Tax,  1895,  PP-  II9-122. 


372  Ski/iing  arid  Incidence  of  Taxation 

3.   Excises 

Since  an  excise,  or  what  is  termed  in  America  an  internal 
revenue  tax,  is  virtually  one  form  of  the  profits  tax  discussed 
above,  the  problem  as  to  whether  it  will  be  shifted  depends 
for  its  solution  on  the  consideration  of  all  the  complicated 
points  referred  to  there. ^  In  the  first  place,  the  tax  may  be 
evaded  in  whole  or  in  part,  with  a  proportionate  loss  to  the 
treasury.^  Secondly,  in  virtue  of  the  process  of  transforma- 
tion,'^ the  revenue  may  accrue  to  the  government,  but  the 
burden  may  be  felt  by  no  one.  Thirdly,  if  the  tax  is  neither 
evaded  nor  transformed,  and  if,  as  is  likely,  there  is  no  room 
for  capitalization,  the  tax  will  be  apt  to  be  shifted.  The  ex- 
tent to  which  it  will  be  shifted  depends,  however,  as  we  have 
seen,^  primarily  on  the  elasticity  of  the  demand,  the  possi- 
bility of  employing  substitutes  and  the  ease  with  which  the 
consumer  may  be  induced  to  use  a  slightly  inferior  article. 
But  it  will  also  be  affected  by  such  considerations  as  the 
height  of  the  tax,  the  existence  of  monopoly,  and  the  ratio  of 
product  to  cost.  To  enter  into  further  details  would  neces- 
sitate a  repetition  of  the  analysis  which  has  been  presented 
above. ^  Bearing  in  mind  these  general  principles  and  quali- 
fications, each  particular  case  must  be  investigated  separately 
as  it  arises,  since  the  possible  combinations  are  numberless. 
To  attempt  such  an  investigation  here  would  obviously  carry 
us  far  beyond  the  limits  of  a  general  study  like  this.^ 

^  Supra,  pp.  339-366.  2  Supra,  p.  9.  '  Supra,  pp.  5-8. 

*  Supra,  p.  342.  5  Supra,  pp.  343-348- 

®  Inductive  studies  of  the  incidence  of  excises  have  been  made  by  E.  Laspeyres, 
"  Statistische  Untersuchungen  iiber  den  Einfluss  einer  Steueraufhebung  auf  die 
Preise  der  bisher  besteuerten  Produkte  "  in  the  Oesterreichische  Statistische  illonats- 
schrift,  iii  (1877),  pp.  495  et  seq. ;  G.  Schanz,  "  Zur  Frage  der  Ueberwalzung  in- 
direkter  Steuern  auf  Grund  des  bayrischen  Malzaufschlages  "  in  Schmoller's /a/Sr- 
buch  Jur  Gesetzgebung,  Verwaltung  und  Volkswirthschaft,  1882,  pp.  563  et  seq.  ; 
Carl  Hager,  Die  Ueberzvalzung  Jer  Zuckersteuer  und  die  Pramie  der  Kubenzucker- 
industrie  in  Deutschland  und Frankreich,  Berhn,  1893;  and  Karl  A.  Lange,  Die 
Wirkungen  des  bayerischen  Malzaufschlaggesetzes  vom  iS.  M'drz,  igio  auf  .  .  . 
die  einzelnen  Schichten  des  Wirthschaftslebens,  Stuttgart,  191 6.  — ■  Cf.Y.  Q,.  Tene- 
relli,  Z'  Azione  delle  Imposte  Indirette  sui  Consumi  con  particulare  Riguardo  alia 
Legislazione  Italiana,  Torino,  1898. 


Other  Taxes  373 

The  possible  ulterior  effects  of  excises  have  also  been  ad- 
verted to  above.  In  some  cases  the  tax  may  lead  to  the  use  of 
substitutes,  unless  these  are  also  taxed ;  in  other  cases  it  may 
lead  to  adulteration  or  to  the  use  of  inferior  grades.  In  some 
cases,  by  checking  consumption  it  may  react  unfavorably  on 
the  producers  and  again  on  the  purveyors  of  the  raw  materials, 
and  so  on,  thus  spreading  its  restrictive  effects  throughout  the 
community.  In  other  cases  a  tax  on  one  commodity  or  em- 
ployment may  give  a  decided  impetus  to  the  sale  and  produc- 
tion of  another  commodity,  which  is  to  be  considered  a  rival 
rather  than  a  correlated  commodity.  In  some  cases,  those  who 
do  not  pay  the  tax  because  their  consumption  is  cut  off  by  the 
rise  of  price  may  suffer  more  than  those  who  continue  to  pur- 
chase the  commodity.  In  other  cases  the  loss  in  the  con- 
sumer's surplus  may  be  very  easily  compensated.  To  follow 
to  its  remote  consequences  the  ultimate  effects  of  an  excise 
would  demand  such  an  accurate  acquaintance  with  all  the 
facts  of  the  particular  economic  situation  as  to  task  the  possi- 
bilities of  the  most  subtle  and  minute  analysis.  It  may  be 
said,  however,  that  in  the  majority  of  cases  such  a  tax  tends  to 
be  shifted  in  whole  or  in  greater  part. 

Much  the  same  may  be  said  of  an  import  duty.  As  a 
general  rule,  this  tax  will  be  partially  or  completely  shifted ; 
but  the  exact  result  will  depend  on  the  particular  conditions 
of  the  individual  case.  The  application  of  the  general  prin- 
ciples of  incidence  to  customs  duties  is,  however,  so  impor- 
tant as  to  warrant  a  somewhat  more  extended  discussion. 

4.    Import  and  Export  Duties 

The  theory  of  international  value,  as  it  has  been  succes- 
sively developed  by  the  classical  economists,  is  nothing  but 
an  application,  although  an  exceedingly  complicated  one, 
of  the  general  law  of  value.^     The  elements  that  enter  into 

*  The  most  successful  restatements  of  the  theory  by  modern  authors  are  to  be 
found  in  Bastable,  The  Theory  of  International  Trade,  with  Some  of  its  Appli- 
cations to  Economic  Policy,  ^ih  ed.,  1903,  and  Edgeworth,  "The  Theory  of  In- 
ternational   Values,"   a  series  of  articles  in  the  Economic  Journal,  iv  (1894), 


374  Shifting  and  Incidence  of  Taxation 

the  equation  of  international  demand  are  so  numerous  and 
so  complex  that  an  investigation  of  the  actual  effects  of 
a  tax  upon  any  one  class  of  commodities  would  require  for 
its  proper  solution,  not  only  an  acquaintance  with  the  details 
of  the  theory  itself,  but  also  an  intimate  knowledge  of  all  the 
forces  influencing  the  supply  of,  and  the  demand  for,  the 
commodities  affected  in  the  two  countries  immediately  con- 
cerned, as  well  as  in  all  the  other  countries  that  constitute 
the  world  market.^  Among  the  considerations  influencing  the 
problem  of  the  incidence  of  a  tax  on  imports  or  exports,  the 
following  are  the  more  important :  — 

(i)  To  what  extent  does  the  exporting  country  control 
the  supply  of  the  commodity  ?  (2)  To  what  extent  does 
the  importing  country  constitute  the  sole  market  for  the 
commodity  ?  (3)  To  what  extent  can  the  commodity  in 
question  be  produced  at  home  ?  (4)  What  is  the  ratio  of 
product  to  cost  ?     (5)   To  what  extent  is  the  demand  elastic  ? 

pp.  35-50,  424-443,  606-638.  The  particular  question  of  the  shifting  of  a  tariff 
tax  was  treated  by  Professor  Bastable  in  his  "  Incidence  and  Effects  of  Import  and 
Export  Duties,"  in  the  Report  of  the  British  Association  for  1889,  pp.  440  et  seq. 
—  Some  very  refined  and  subtle  mathematical  studies  as  to  the  incidence  of  im- 
port duties  have  been  made  by  C.  F.  Bickerdike,  "The  Theory  of  Incipient  Taxes," 
Economic  Journal,  xvi  (1906),  pp.  529-535,  and  S.  J.  Chapman,  "A  Note  on  the 
Incidence  of  Protective  Import  Duties,"  ibid.,  xix  (1909),  pp.  133-139  and  305-308. 
The  practical  value  of  such  speculations  is  rather  remote.  We  must  bear  in  mind 
here,  as  well  as  in  some  of  Professor  Edgeworth's  diagrams,  the  warning  given  by 
Auspitz  and  Lieben  at  the  close  of  their  mathematical  discussion  of  the  incidence 
of  import  duties :  "  Nur  bei  volliger  Stabilitat  der  Preise  aller  anderen  Artikel,  sowie 
der  Werthschatzung  des  Geldes  seitens  aller  in  Betracht  kommenden  Individuen, 
konnen  wir  iiberhaupt  Kurven  fiir  irgend  einen  Artikel  aufstellen  ;  von  gleichzeitig 
fiir  mehrere  oder  gar  fiir  alle  Artikel  geltenden  Kurven  kann  daher  nicht  die  Rede 
sein."  Untersuchungen  iiber  die  Theorie  des  Preises,  1889,  p.  428.  —  Professor 
Chapman  himself  concludes  "  that  no  general  statement  can  be  made  about  the 
incidence  of  an  incipient  import  duty."     Op.  cit.,  p.  308. 

^  As  against  those  who  expect  a  precise  answer  to  every  practical  problem  of 
the  effect  of  a  tariff,  the  statement  of  Professor  Nicholson  seems  almost  justifiable, 
that  in  many  cases  "  the  only  answer  is  that  an  answer  is  impossible."  In  another 
place  he  says  that  "  the  incidence  of  import  and  export  duties,  especially  when 
the  indirect  effects  are  considered,  is  the  most  complicated  and  difficult  problem 
in  economics. "  —  "Tariffs  and  International  Commerce."  By  J.  S.  Nicholson. 
In  the  Scottish  Geographical  Magazine,  September,  1891. 


Other  Taxes  375 

Let  us  take  up  first  the  questions  connected  with  an 
import  duty.  The  imposition  of  the  tax  may  be  considered, 
in  ordinary  cases,  as  an  addition  to  the  cost  of  production, 
and  as  such  increases  the  price  of  the  article  in  the  importing 
country  by  the  amount  of  the  duty.  Under  such  conditions 
it  is  true  that  "a  tariff  is  a  tax,"  and  that  it  falls  on  the  con- 
sumer. This  conclusion  is  based  on  the  assumption  that  the 
producers  do  not  bear  any  of  the  tax  ;  that,  although  the 
sales  necessarily  fall  off  more  or  less,  according  as  the  de- 
mand is  sensitive  or  not,  by  reason  of  the  increased  price, 
the  producers  find  an  outlet  for  their  goods  in  some  other 
country,  so  as  to  recompense  them  for  the  partial  loss  of  the 
market  in  the  country  which  imposes  the  tax. 

This  assumption,  however,  is  not  always  correct.  It  may 
happen  that  the  importing  country  constitutes  either  the  sole 
market  for  the  commodity,  or  such  an  important  part  of  the 
market  that  the  producer  finds  it  impossible  or  difficult  to 
extend  his  sales  in  other  countries.  To  the  extent  that  this 
is  true,  the  producer  finds  it  to  his  interest  to  avoid  any  sub- 
stantial diminution  of  the  demand  in  his  chief  market.  This 
can  be  accomplished,  however,  only  by  his  consenting  to  bear 
a  portion  of  the  tax  himself.  The  conditions  that  are  most 
favorable  to  the  consumer  in  the  importing  country  are  :  first, 
that  the  importing  country  constitutes  the  sole  market  for  the 
commodity ;  and,  second,  that  the  demand  for  the  commodity 
is  so  very  elastic  that  a  slight  increase  of  price  causes  a  very 
great  diminution  in  the  sales.  But  from  this  very  exceptional 
case,  where  the  producer  tends  to  bear  a  large  share  of  the 
tax,  down  to  the  ordinary  case,  where  the  consumer  bears  the 
whole  of  the  tax,  there  are  all  kinds  of  gradations. 

The  danger  of  the  assumption  that  the  tariff  is  always  a  tax  is 
illustrated  by  an  article  of  Professor  Taussig.^  He  estimated 
that  as  6370  million  pounds  of  sugar  were  consumed  in  the 
United  States,  the  total  taxes  paid  by  the  consumer  were  loi 
million  dollars  ;   and  since  the  proceeds  of  the  duty  were  only 

^  F.  W.  Taussig,  "  Sugar :  a  Lesson  on  Reciprocity  and  the  Tariff,"  in  the 
Atlantic  Monthly,  March,  1908. 


376  Shifting  and  Incidence  of  Taxation 

$52,400,000,  he  estimated  that  the  remainder,  or  $48,600,000, 
was  received  by  the  sugar  producers.  Practical  merchants 
connected  with  the  import  of  sugar  showed,  however,  in  the 
hearings  before  the  Ways  and  Means  Committee,^  that  such 
a  calculation  is  egregiously  incorrect.  For  since  a  portion  of 
the  sugar  supply  comes  in  free  of  duty  and  another  portion 
with  a  partial  remission  of  duty,  the  assumption  that  the  price 
of  all  sugar  is  raised  by  a  tax  on  the  import  of  a  part  is  mani- 
festly erroneous.  In  a  subsequent  article,^  Professor  Taussig 
frankly  concedes  his  mistake,  not  however  in  time  to  prevent 
its  being  copied  with  approval  in  some  text-books.^ 

Another  very  important  element  in  the  problem  is  the 
extent  to  which  the  home  production  in  the  importing  country 
may  fill  the  gap  caused  by  the  diminution  in  the  imports  from 
the  exporting  country.  The  ordinary  reasoning  that  "  a  tariff 
is  a  tax  "  is  based  on  the  assumption,  as  we  have  seen,  that 
the  equilibrium  will  be  reached  when  the  decreased  supply 
from  the  foreign  country  sells  at  the  increased  price.  If  the 
home  country  cannot  produce  the  article  at  all  —  that  is,  if 
the  exporting  country  has  a  monopoly  of  the  supply  —  this 
assumption  is  valid.  But  if  the  home  country  has  hitherto 
been  prevented  from  producing  the  article  solely  because  the 
price  has  been  too  low  to  admit  of  profits,  the  degree  to  which 
home  production  can  round  out  the  supply  depends  entirely 
on  the  extent  to  which  the  price  rises.  Suppose  that  an  im- 
ported commodity  can  be  produced  abroad  so  as  to  sell  in  the 
importing  country  at  $10.00,  while  it  can  be  produced  in  the 
importing  country  only  at  $12.50.  If  a  tax  of  $2.00  per  unit  is 
imposed,  other  things  being  assumed  as  equal,  the  price  will 
rise  to  $12.00,  and  the  demand  will  fall  off.  But  suppose  that 
the  importing  country  can  now  furnish  a  part  of  the  supply, 
and  because  of  the  larger  output  will  be  able  to  produce  with 
profit  at  $11.00.      Notwithstanding  the  tax  of  $2.00,  the  price 

^  Tariff  Hearings  before  the  Committee  on  Ways  and  Means,  1908-1909.  See 
especially  the  testimony  of  Mr.  Atkins,  iii,  pp.  3345-3383. 

■■^  Quarterly  Journal  of  Economics,  xxii  (1909),  pp.  548-553. 
8  Cf.  e.g.  Ely,  Outlines  of  Economics,  new  ed.  1908,  p.  359. 


Other  Taxes  377 

cannot  rise  above  $1  i.cx),  the  demand  will  not  fall  off  as  much 
as  before,  and  the  tax  will  be  divided  between  the  foreign 
producer  and  the  home  consumer.  The  extent  to  which  the 
home  producer  can  capture  a  part  of  the  market  depends, 
among  other  things,  upon  the  ratio  of  product  to  cost.  If  the 
commodity  is  produced  at  home  under  the  law  of  increasing 
cost,  which  as  we  have  seen  is  the  usual  case  in  competitive 
industries,  the  chance  of  the  home  producer  is  not  so  good ; 
if  under  the  law  of  decreasing  cost,  which  as  we  know 
implies  a  trend  toward  monopoly,  his  chances  are  better. 
But  it  is  obvious  that  cases  may  arise  where  it  is  not  true 
that  "  the  tariff  is  a  tax  "  in  the  sense  that  the  whole  burden 
of  an  import  duty  is  necessarily  borne  by  the  consumer.' 

The  indirect  effects  of  an  import  duty  are  interesting,  but 
lie  beyond  the  scope  of  this  inquiry.  These  effects,  if  care- 
fully studied,  would  be  seen  to  influence  the  foreign  as  well 
as  the  home  country.  So  far  as  the  foreign  country  is  con- 
cerned it  may  be  stated  that  to  the  extent  that  the  market  in 
question  is  of  importance  to  the  exporting  country,  the  im- 
position of  an  import  duty  will  slightly  alter  the  equilibrium, 
to  the  disadvantage  of  the  foreign  country.^  This,  however, 
from  the  point  of  view  of  revenue,  is  clear :  that  the  greater 

1  This  is  now  recognized  by  the  foremost  writers  on  the  subject.  Cf.  the  <jui>- 
tations  in  Professor  Edgeworth's  article  in  the  Economic  Journal,  iv,  p.  4j,  and 
his  own  statements,  ibid.,  pp.  46-48.  The  conclusions  to  which  Professor  Carver 
comes  in  his  article  on  "The  Shifting  of  Taxes"  in  the  Yale  Revinv,  v,  p.  271, 
are  therefore  really  not  "  ojiposed  to  the  orthodox  teachings"  on  the  subject, 
as  he  assumes,  if  by  orthodoxy  we  mean  the  views  commonly  held  to  be 
authoritative.  Professor  Plehn  in  his  Introduction  to  Public  Finance,  fourth 
edition,  1920,  pp.  149-150,  gives  a  list  of  five  rare  cases  in  which  a  part  of  the 
import  duties  will  be  shifted  to  the  foreign  consumer.  Only  one  of  these,  how- 
ever, seems  to  be  entirely  sound,  viz.,  case  b,  where  a  "tax  is  imposed  on  goods 
produced  abroad  by  a  large  fixed  plant  for  a  limited  market  which  would  be 
lost  if  the  prices  were  raised." 

'^As  Professor  Pigou  puts  it  in  Protective  and  Preferential  Duties,  1906,  p.  23: 
"Economists  are  agreed  that  a  part  of  the  direct  burden  of  imjiort  duties  is  in 
general  shifted  permanently  on  to  foreigners.  .  .  .  The  tax  will  h.ive  altered  the 
rate  of  interchange  in  our  favour,  and  so  compelled  the  generality  of  foreign 
consumers  to  offer  a  little  more  than  before  of  their  products  in  exchange  for  a 
given  quantity  of  ours." 


^yS  Shifting  and  Incidence  of  Taxation 

the  supply  that  is  captured  by  the  home  producer,  the  less 
will  be  the  proceeds  of  the  tax.  If  the  foreign  producer  is 
entirely  shut  out,  the  revenue  will  be  zero.  The  amount  of 
the  immediate  loss  to  the  community  in  general  will  thus 
depend  on  the  price  at  which  the  home  producer  can  afford 
to  sell.  If,  in  the  extreme  case  mentioned,  the  home  pro- 
ducer supplies  the  entire  market  at  a  price  of  $12.00,  the 
government  loses  its  whole  revenue  from  the  tax,  and  the 
consumers  lose  the  entire  amount  of  the  tax  through  the  in- 
crease of  price.  If,  on  the  other  hand,  the  price  of  the  home 
product  after  the  shutting  out  of  foreign  competition  and  the 
development  of  improved  processes  at  home  can  be  finally 
brought  down  to  a  point  lower  than  $10.00,  the  revenue  will 
indeed  still  be  zero,  but  the  consumers  will  lose  nothing,  and 
the  community  will  have  gained  the  advantages  resulting 
from  an  increase  of  industry.  This,  however,  brings  us  at 
once  to  the  controversy  between  free  trade  and  protection  — 
a  controversy  that  can  be  settled  only  by  considering  the 
wider  and  more  permanent  results  of  an  international  indus- 
trial policy.  What  concern  us  here  are  the  immediate  results, 
or  the  actual  incidence  of  an  import  duty. 

In  the  case  of  an  export  duty,  much  the  same  conclusions 
can  be  reached.  An  export  duty  ordinarily  falls  on  the  citi- 
zen of  the  exporting  country.  But  if  the  duty  is  imposed  on 
a  commodity  of  which  the  country  has  a  monopoly,  and 
still  more  if  the  demand  for  this  monopolized  commodity  is 
comparatively  persistent,  it  may  happen  that  an  export  tax 
will  be  shifted  to  the  foreign  consumer.  It  is  noteworthy 
that  the  chief  examples  of  export  duties  still  to  be  found  are 
those  of  duties  on  articles  which  approach  the  conditions  of 
monopoly  supply.  Such  are,  for  example,  the  export  duties 
on  opium  in  India  and  on  guano  in  Peru.  But  it  is  to  be 
observed  that  the  cases  of  perfectly  stable  demand,  even  for  a 
monopolized  article,  are  exceedingly  rare.^  There  is  scarcely 
any  commodity  for  which  some  substitute,  even  though  it  be 
incomplete,  cannot  be  found.     To  the  extent  that  this  is  true, 

^  See  above,  pp.  229-231. 


Other  Taxes  379 

more  and  more  of  the  export  duty  will  be  borne  by  the  mo- 
nopolist exporter  for  fear  that  the  decrease  of  sales,  even  at  a 
higher  price,  will  lower  his  maximum  monopoly  revenue. 

5.    Stamp   Taxes 

Stamp  taxes  are  usually  supposed  to  be  shifted  to  the  con- 
sumer or  purchaser.  This  does  not,  however,  necessarily  fol- 
low. If  the  stamp  taxes  are  imposed  on  the  sale  of  particular 
commodities  —  as  for  instance,  the  American  internal  revenue 
duty  on  proprietary  medicines  —  we  are  confronted  by  what 
is  an  ordinary  form  of  the  taxation  of  profits  discussed  above. 
This  is  equally  true  when  the  so-called  stamp  taxes  are  noth- 
ing but  taxes  on  production,  levied  by  means  of  a  stamp,  as 
in  the  American  taxes  on  tobacco,  whiskey  and  beer.  Stamp 
taxes  here  do  not  really  form  a  distinct  kind  of  taxes. 

If  the  stamp  taxes  are,  however,  taxes  on  transportation 
and  communication,^  much  again  will  depend  on  the  height  of 
the  tax,  the  character  of  the  business  and  the  elasticity  of 
the  demand.  For  instance,  in  the  case  of  the  American  war- 
revenue  taxes  of  1898,  the  one  cent  tax  on  telegraph  messages 
as  well  as  express  receipts  was  shifted  to  the  consumer, 
partly  because  the  tax  was  high  enough,  from  the  standpoint 
of  the  telegraph  and  express  companies,  to  warrant  an  at- 
tempt to  throw  it  on  the  sender  of  the  message  or  parcel,  and 
partly  because  the  tax  was  at  the  same  time  so  low  that  the 
consumer  did  not  care  to  abandon  the  use  of  those  particular 
media  of  communication  and  transportation.  The  telegraph 
is  used  in  America  almost  exclusively  for  purposes  of  busi- 
ness ;  and  the  service  may  to  a  large  extent  be  classed  as  a 
necessary,  with  comparative  inelasticity  of  demand.  The  ex- 
press companies,  moreover,  even  in  that  part  of  their  trans- 

^  The  only  detailed  investigation  of  such  a  tax  is  the  excellent  study  made  by 
Professor  Jannacone  of  the  Italian  tax  on  emigrants,  and  incidentally  of  the 
American  head  tax  of  four  dollars  apiece  on  immigrants.  /,'  Irnposta  sul  Tras- 
porto  degli  Emigrante  e  la  sua  Incidenza.  Par  Pasquale  Jannacone.  N.d. 
(1907),  96  pp. 


380  Shifting  and  Incidence  of  Taxation 

actions  where  they  come  into  competition  with  the  postal 
service,  did  not  run  much  risk  of  reducing  their  business  by 
adding  the  tax  to  the  price. 

On  the  other  hand,  the  one  cent  tax  on  parlor  car  tickets 
was  borne  by  the  transportation  companies,  partly  because 
of  their  fear  of  losing  patronage,  partly  because  the  tax  con- 
stituted a  less  important  percentage  of  the  price  than  was 
true  in  the  preceding  cases.  From  the  consumer's  stand- 
point, in  the  case  of  a  moderate  comfort  like  the  parlor  car 
service,  even  a  slight  addition  to  price  may  mean  a  consid- 
erable diminution  of  demand  for  the  service.  From  the  pro- 
ducer's standpoint,  one  cent  on  a  sum  ranging  from  two  to 
four  dollars  (the  average  price  of  a  parlor  car  ticket)  is  of 
considerably  less  consequence  than  one  cent  on  a  sum  rang- 
ing from  twenty-five  to  forty  cents  (the  average  price  of  a 
telegraph  message  or  express  shipment).  Even  here,  how- 
ever, it  was  for  a  time  open  to  question  whether  the  condi- 
tions of  comparative  elasticity  of  demand  and  supply  would 
not  change  to  such  an  extent  as  to  cause  the  tax  on  parlor 
car  tickets  to  be  shifted  to  the  consumer,  just  as  the  ordinary 
tax  on  railroad  tickets  in  the  continental  countries  of  Europe 
is  also  borne  by  the  passenger.^ 

Finally,  when  a  substantial  tax  is  imposed  on  an  act  of  com- 
munication or  of  transportation,  where  the  demand  is  sensi- 
tive, the  tax  may,  in  rare  instances,  seem  to  have  the  very 
exceptional  result  of  lowering  prices.  When  the  United 
States,  for  instance,  imposed,  in  1898,  a  one  cent  tax  on 
ordinary  fifteen  cent  telephone  messages,  the  telephone  com- 
panies were  so  apprehensive  of  diminishing  their  maximum 

1  Professor  Jannacone,  while  not  denying  these  facts,  thinks  (o/.  cit.,  p.  i8) 
that  the  above  solution  is  "  too  simple."  It  must,  however,  be  borne  in  mind 
that  the  above  illustration  was  designed  to  call  attention  primarily  to  the  impor- 
tant considerations.  To  go  into  the  minutiae  of  the  question  with  reference  to 
rival  and  correlated  portions  of  the  business,  or  to  consider  the  problems  of 
monopoly  or  competition,  or  any  other  of  the  points  adverted  to  in  the  earlier 
sections  of  this  volume,  would  simply  involve  ourselves  in  repetition.  Professor 
Jannacone,  moreover,  in  his  own  analysis  of  the  immigrant  tax,  properly  lays  the 
chief  stress  on  the  question  of  elasticity  of  demand. 


Other  Taxes  381 

monopoly  revenue,  that  they  not  only  decided  to  refrain  from 
adding  the  tax  to  the  price,  but  also  resolved  to  evade  the  tax 
entirely  by  reducing  telephone  messages  to  a  price  below 
fifteen  cents.  Ordinarily,  however,  a  monopoly  like  the 
telephone  company  would  be  presumed  to  have  realized  its 
maximum  advantage  at  the  price  current  before  the  imposi- 
tion of  the  tax.  The  tax  may,  indeed,  in  this  particular  case, 
have  led  the  company  to  consider  the  whole  matter  anew ; 
but,  after  all,  the  reduction  of  the  price  would  have  ultimately 
come  about,  tax  or  no  tax.  The  tax,  therefore,  was  the  occa- 
sion, rather  than  the  cause,  of  lower  prices. 

When  the  stamp  taxes  are  taxes  on  acts  or  transactions, 
the  incidence  will  depend  on  whether  these  transactions  are 
of  a  commercial  character.  In  the  case  of  judicial  taxes, 
sometimes  termed  court  costs  and  fees,  there  is  evidently  no 
one  to  whom  the  taxpayer  can  shift  the  burden.  In  the  case 
of  ordinary  commercial  transactions,  the  important  considera- 
tions, again,  will  be  the  height  of  the  tax  and  the  elasticity  of 
the  demand.  When  the  tax  is  very  insignificant,  as  in  the 
case  of  a  tax  on  the  ordinary  receipts  of  sales,  the  merchant 
is  very  apt  to  bear  the  tax  himself.  When  the  tax  is  suf- 
ficiently large  to  make  it  an  inducement  to  the  seller  to  shift 
the  burden,  the  tax,  if  imposed  on  him,  will  usually  be  shifted 
to  the  buyer,  except  to  the  extent  that  this  shifting  may  dimin- 
ish the  number  of  transactions  and  thus  induce  the  seller  to 
bear  a  part  of  the  burden  himself.  In  such  cases,  the  bur- 
den is  apt  to  be  divided  in  accordance  with  the  relative  elas- 
ticity of  demand  and  supply.  The  net  result  may  then  be  a 
diminution  of  transactions. 

This  leads  us  to  an  important  consideration,  the  force  of 
which  has  frequently  been  overlooked.  Where  the  net  re- 
sult of  a  tax  on  transactions  is  a  decrease  in  the  transactions, 
the  real  burden  may  be  regarded  as  falling  on  neither  the 
seller  nor  the  purchaser.^     It  is  an  instance  of  the  effects  of 

^This  is  overlooked  by  Pierre  Bergeron  de  Charron,  De  VAssiette  et  de  P Inci- 
dence de  rimpol  dW-'.nregislremertt,  1898,  Troisieme  Partie,  chap,  i,  who  takes  the 
ordinary  and  superficial  view  of  the  subject. 


382  Shifting  and  Incidence  of  Taxation 

a  tax  being  injurious  to  those  who  do  not  pay  it,  rather  than 
to  those  who  pay.  In  so  far  as  the  parties  to  the  transaction 
are  concerned,  the  result  of  the  decrease  of  sales  of  real 
estate,  for  instance,  is  to  lower  the  selling  value  of  the  land. 
For  any  impediment  to  the  free  transfer  of  a  commodity  is 
bound  to  diminish  its  relative  desirability  or  value.  The  pur- 
chaser indeed  pays  the  tax,  but  he  will  recoup  himself  by 
paying  so  much  less  for  the  land.  Were  there  no  tax,  he 
would  be  willing  to  pay  a  larger  price.  The  result  hence  is 
that  the  tax  is  capitalized  or  amortised  into  a  lower  selling 
price  of  the  land,  and  it  is  only  the  original  owner,  who  possesses 
the  land  before  the  tax  is  imposed  or  increased,  who  suffers. 
After  the  tax  has  been  in  existence  long  enough  for  the  origi- 
nal owner  to  part  with  his  land,  the  new  owner  as  a  conse- 
quence of  the  absorption  of  the  tax  will  not  suffer.^ 

This  kind  of  capitalization  or  amortisation,  however,  differs 
from  the  ordinary  phenomenon  discussed  above.^  For  or- 
dinarily capitalization  depends  on  the  regular  recurrence  of  a 
tax,  and  can  be  ascertained  by  the  simple  arithmetical  pro- 
cess of  capitalizing  the  difference  between  the  present  and 
the  future  income.  In  the  case,  however,  of  taxes  or  the 
transfer  of  real  estate,  while  the  tax  indeed  recurs,  the  re- 
currence is  at  irregular  intervals,  and  the  depreciation  con- 
sists in  the  capitalization  of  an  unknown  quantity.    This  very 

^  Dr.  Leo  Petritsch,  Zur  Lehre  von  der  Ueberw'dlzung  der  Steuern  mit  beson- 
derer  Beziehung  aiif  den  Borsenverkehr,  1903,  chap,  i,  clearly  perceives  this. 
His  whole  discussion  is  noteworthy.  —  Some  writers,  like  Leroy-Beaulieu,  Traite 
de  la  Science  des  Finances,  7th  ed.,  1906,  i,  p.  631,  recognize  the  fact  that  these 
taxes  on  land  transfer  diminish  the  value  of  the  land,  but  they  erroneously  think 
that  each  time  the  land  is  sold  its  price  will  fall.  "  Ces  droits  constituent  une 
veritable  confiscation  d'une  partie  notable  du  capital  que  represente  Timmeuble. 
II  faut  epargner  trois  on  quatre  ans  le  produit  d'une  propriete  pour  recouvrer 
la  somme  payee  au  fisc  a  titre  de  droit  de  mutation.  .  .  .  Des  droits  de  mutation 
si  eleves  deprecient  la  valeur  du  sol  dans  les  mains  de  tous  les  detenteurs,  ils 
nuisent  autant  a  I'acheteur  qu'au  vendeur.  L'un  et  I'autre  se  trouvent  apres  I'acte 
dans  une  condition  plus  mauvaise  qu"auparavant,  au  moins  a  un  certain  point 
de  vue.'  Yet,  as  Petritsch  pointed  out  some  years  before  {op.  cit.,  p.  20),  the 
value  of  the  land  falls,  not  because  of  the  tax  as  such,  but  because  of  the  lesser 
frequency  of  the  sales.  '^  Supra,  pp.  221-226. 


Other  Taxes  383 

uncertainty  contributes  to  render  real  estate  values  unstable, 
and  in  itself  would  suffice  to  explain  the  absence  in  France  of 
such  an  important  class  of  operators  as  the  "real  estate  in- 
terests "  in  large  American  cities. 

The  same  considerations  which  have  just  been  mentioned 
apply,  with  some  modifications,  to  the  taxes  on  stock-  and 
produce-exchange  transactions.  The  process,  however,  is 
even  more  subtle  and  complicated. 

The  ordinary  view  of  such  taxes  is  that  they  are  borne  by 
the  respective  parties  in  interest  —  the  buyers  and  sellers  of 
securities  or  the  speculators  on  the  bull  or  the  bear  side  in 
produce,  so  that  the  tax  may  really  be  considered  as  a  tax  on 
speculation,  or  on  the  unearned  or  fortuitous  profit  of  the 
speculator.  A  tax  on  stock-  and  produce-exchange  trans- 
actions would  thus  be  a  tax  on  speculative  profits. 

In  reality,  however,  it  is  nothing  of  the  kind.  The  results 
are  quite  different. 

The  real  function  of  speculation,  as  has  been  abundantly 
shown  by  modern  economists,^  and  as  has  recently  been  ex- 
plained in  detail  in  the  admirable  report  of  the  special  com- 
mission on  the  exchanges  appointed  by  Governor  Hughes  of 
New  York,^  is  to  afford  a  continuous  open  market  for  the 
transactions,  and  thus  to  diminish  the  fluctuations  of  price. 
Any  attempt  to  restrict  legitimate  trading  is  bound  to  inter- 
fere with  this  steadying  influence.  Thus  the  famous  prohibi- 
tion of  speculation  in  gold  during  the  Civil  War  in  the  United 
States  resulted  in  immensely  increased  oscillations  of  price, 
which  continued  until  the  hasty  repeal  of  the  law ;  and  the 
recent  German  legislation  against  futures  in  the  wheat  market 
produced  an  effect  the  contrary  of  what  was  anticipated,  lead- 
ing, after  the  lapse  of  a  decade,  to  an  alteration  in  the  law.^ 
A  tax  on  produce-exchange  transactions  would  tend  to  have 

^  Cf.  e.g.  Seligman,  Principles  of  Economics,  4th  ed.,  1909,  pp.  356-366. 

"^Report  of  the  New  York  Commission  on  the  Stock  and  Produce  Exchanges, 
New  York,  1909. 

^  Cf.  Emery,  "The  German  Exchange  Act,"  in  Political  Science  Quarterly, 
X  (1895)  ^^^  ''i"  ('898). 


384  Shiftijig  a7id  Incidence  of  Taxation 

the  same  kind  of  effect  as  an  absolute  prohibition,  although 
its  efficacy  would  obviously  be  far  less.  In  other  words,  a  tax 
would  tend  to  diminish  the  number  of  transactions  or  to  re- 
strict the  market.  To  this  extent  it  would  lead  to  an  increase 
in  oscillations  of  price.  But  the  tax,  although  paid  by  the 
broker,  would  be  charged  to  the  principal,  whether  seller  or 
purchaser,  and  would  not  be  borne  by  this  principal ;  for  as 
long  as  he  continued  to  speculate,  the  gains  on  the  larger 
margins  of  the  fewer  transactions  would  presumably  equal 
the  fewer  gains  on  the  smaller  margins  of  the  more  fre- 
quent transactions.  The  real  burden  would  be  borne,  not 
by  the  speculators,  but  by  the  producers  or  the  consumers 
of  the  commodity  traded  in  on  the  produce  exchange.  For 
the  advantages  of  the  relative  stability  of  price  due  to 
produce  speculation  inure,  as  is  well  recognized,  either 
to  the  producer  or  to  the  consumer,  or  to  both.  The  tax 
on  produce-exchange  transactions  tends,  therefore,  to  en- 
gender consequences  which  are  not  usually  expected.^ 
Where,  indeed,  as  is  commonly  the  case,  the  tax  is  relatively 
slight,  these  consequences  are  almost  imperceptible.  But  at 
all  events  the  tax  must  not  be  regarded  as  one  on  specula- 
tors' profits. 

In  the  case  of  stock-exchange  taxes,  the  situation  is  still 
more  complicated  by  the  fact  that  we  are  not  dealing  so 
directly  with  producers  and  consumers  of  a  taxable  com- 
modity. The  tax  is  imposed  on  the  transfer  of  securities,  not 
of  ordinarily  consumable  commodities.  Here,  again,  it  may 
be  stated  that  the  tax  is  not,  as  usually  imagined,  borne  either 
by  the  brokers  or  by  their  immediate  principals  who  are 
trading  on  margins.  For  here,  as  on  the  produce  exchanges, 
any  hindrance  to  the  free  speculative  movement  tends  to  in- 
crease the  fluctuation  of  prices,  and  with  this  widening  of  the 
upper  and  lower  limits  of  stock  quotations  even  the  so-called 
traders  or  room  brokers  in  New  York,  who  virtually  speculate 
on  their  own  account,  will  tend,  notwithstanding  the  diminu- 
tion in  transactions,  to  make  as  high  profits  as  before.     The 

^  Cf.  Petritsch,  op.  cit.,  chap.  2. 


Other  Taxes  385 

real  burden  here  falls,  not  on  the  parties  to  the  transactions, 
but  on  certain  outsiders. 

Who  are  these  outsiders  ?  In  the  first  place,  they  are  apt 
to  be  the  smaller  capitalists,  who  have  borrowed  on  securities, 
and  who  are  less  able  to  endure  the  losses  resulting  from  ex- 
cessive declines  in  value  than  are  their  larger  brethren.  In 
the  second  place,  since  the  tax  increases  pro  tanto  the  ex- 
pense of  transferring  securities  and  thus  diminishes  the  mo- 
bility of  capital,  it  is  likely  to  increase,  even  though  slightly, 
the  rate  of  interest.  If,  however,  the  rate  of  interest  rises, 
the  capital  value  of  the  securities  will  decline.  We  would  thus 
have  a  kind  of  capitalization  of  taxation  somewhat  compara- 
ble, although  not  in  degree,  to  the  capitalization  brought  about 
by  a  tax  on  the  securities  themselves.^  If,  however,  instead 
of  dealing  with  a  new  or  suddenly  increased  tax  on  stock- 
exchange  transfers,  we  have  to  do  with  a  long  and  well  estab- 
lished tax,  the  net  result  will  obviously  be  that  when  the 
securities  are  initially  listed  on  the  exchange  they  will  fetch 
a  price  somewhat  lower  than  would  be  the  case  were  there  no 
tax  on  the  stock-exchange  transaction.  The  real  losers,  there- 
fore, will  be  the  bankers  who  float  the  securities ;  or,  still 
more  likely,  the  corporation  or  enterprise  which  has  arranged 
with  the  promoters  to  underwrite  the  issue.  The  ultimate 
result  will  be  a  slight  falling  off  in  the  profits  of  the  stock- 
holders in  the  industrial  and  other  enterprises  whose  securities 
are  listed  on  the  exchanges  ;  and  to  the  extent  that  the  issues 
consist  of  government  bonds,  a  slight  increase  in  the  public 
expenditures,  which  is,  of  course,  far  more  than  compensated 
by  the  proceeds  of  the  tax,  when  the  same  government  that 
issues  the  securities  also  imposes  the  tax.  Thus  here  again 
we  see  that  the  consequences  of  a  tax  are  frequently  quite 
different  from  those  that  are  expected  or  intended. 

6.    Income   Taxes 

The  incidence  of  an  income  tax  has  been  much  discussed. 
One  writer  has  even  attempted  to  prove  that  an  equal  tax  on 

1  Petritsch,  op.  cit.,  p.  68.  *  Cf.  supra,  p.  222. 


386  Shifting  and  Incidence  of  Taxation 

incomes  is  the  only  tax  that  cannot  be  shifted.^  He  draws 
the  conclusion  that  the  income  tax  must  therefore  be  the 
ideal  —  the  only  possible  realization  of  the  principle  of 
equality  of  taxation.  This  contention,  however,  is  open  to 
criticism  for  two  reasons.  In  the  first  place,  we  have  seen 
that  there  are  many  other  taxes  which  cannot  be  shifted  — 
like  the  poll  tax,  taxes  on  inheritances,  on  rent,  on  salaries, 
and  certain  taxes  on  monopolies.  Secondly,  and  more  impor- 
tant, it  is  untrue  that  the  income  tax,  as  frequently  levied, 
cannot  be  shifted. 

In  some  countries,  as  in  England,  the  income  tax  is  simply 
a  combination  of  taxes  on  the  separate  ingredients  of  income, 
and  it  often  happens  that  the  so-called  income  tax  is,  in  real- 
ity, a  system  of  taxes  on  gross  revenue  or  gross  receipts.  In 
such  cases  there  can  be  no  question  that  each  part  of  the 
income  tax  follows  the  law  of  incidence  of  the  respective  sepa- 
rate taxes,  so  that  there  is,  in  respect  of  incidence,  practically 
no  difference  between  a  so-called  income  tax  and  the  other 
direct  taxes  of  which  the  income  tax  is  substantially  composed. 
If  the  total  income  is  composed  of  wages,  the  law  of  incidence 
cannot  be  different,  whether  we  call  the  share  income  or 
wages.  If  the  total  income  is  composed  of  profits  in  the 
broad  sense,  the  tax  will  be  shifted  or  not,  according  to  the 
rules  of  incidence  that  govern  a  tax  on  profits.  If  the  income 
is  derived  from  house  rents,  the  final  burden  will  be  borne  in 
accordance  with  the  principles  laid  down  in  discussing  the  tax 
on  real  estate.  If  some  of  the  separate  parts  are  shifted,  the 
whole  cannot  possibly  remain  unshifted. 

In  those  cases,  indeed,  where  the  tax  is  levied  on  pure 
income  in  the  strict  economic  sense,  the  tax  is  substantially 
a  tax  on  economic  rent,  plus  a  tax  on  net  profits,  plus  a  tax 
on  wages.  Now,  the  tax  on  economic  rent  and  on  net  profits 
cannot  be  shifted ;  and,  therefore,  as  regards  all  members  of 
the  community  except  the  wage-earners,  a  tax  levied  on  pure 
income  tends  to  stay  where  it  is  imposed.  So  far  as  the  lowest 
incomes  are  exempted  from  the  tax,  the  tendency  would  also 

1  Kaizl,  Die  Lehre  von  der  Ueberwdlzung  der  Steuern,  pp.  IOI-I18. 


Other  Taxes  387 

be  for  the  income  tax  on  the  laborers  to  stay  where  it  is  put. 
But,  even  in  such  cases,  there  is  no  absolute  certainty  that 
the  income  tax  will  not  be  shifted.  In  actual  life,  of  course, 
as  we  very  rarely  find  either  a  pure  income  tax  or  an  equal 
income  tax,  we  cannot  safely  rely  on  the  complete  non-trans- 
ferability  of  the  tax.  Nevertheless,  to  the  extent  that  the  tax 
may  be  considered  one  on  surplus,  rather  than  on  margin,  the 
chances  are  that  the  tax  will  remain  where  it  is  originally 
placed. 

This  entire  question,  however,  like  that  of  the  incidence 
of  stamp  duties  and  taxes  on  exchange,  as  well  as  the  wider 
problem  of  the  shifting  of  all  taxes  from  the  consumer  onward, 
practically  resolves  itself  into  the  old  problem  whether  a  tax 
is  to  be  regarded  as  a  cost  of  production  or  an  outlay  for 
consumption. 

In  all  the  cases  that  we  have  thus  far  discussed  we  have 
traced  the  shifting  of  taxes  down  to  the  consumer.  Certain 
taxes,  we  have  found,  are  never  shifted  ;  other  taxes  are  some- 
times shifted  in  whole  or  in  part  to  the  consumer.  But  will 
not  the  consumer  in  turn  shift  the  burden  to  some  one  else } 
Here  we  must  remember  the  theory  of  Canard,  Thiers  and 
Stein,  that  every  tax  is  shifted  on  everybody  —  that  every 
consumer  will  again  shift  the  tax  on  a  third  party,  and  that 
this  third  party  who  is  again  a  consumer  will  shift  it  to  some 
one  else  and  so  on  ad  infinitum.  Since  every  one  is  a  con- 
sumer, every  one  will  thus  bear  a  portion  of  the  taxes  that 
everybody  else  pays. 

The  error  of  this  doctrine  lies  in  the  failure  to  distinguish 
between  productive  and  unproductive  consumption.  If  every 
taxpayer  were  engaged  in  production  and  paid  taxes  only  on 
what  he  employed  for  the  purposes  of  further  production, 
there  might  be  some  truth  in  the  foregoing  doctrine.  Many 
taxes  fall  on  individuals  who  are  not  producers  at  all,  so 
that  there  is  no  question  of  any  shifting  to  the  consumer, 
while  each  consumer  uses  only  a  part  of  the  commodities 
consumed  by  him  for  productive  purposes.  Every  one  con- 
sumes unproductively.     Whatever  an  individual  spends  on 


388  Shifting  and  Incidence  of  Taxation 

luxuries,  or  on  anything  but  necessaries,  is  an  expenditure 
which,  so  far  as  he  is  concerned,  does  not  give  rise  to  any- 
further  relations  of  producer  and  consumer.  If  the  consumer, 
on  whom  a  certain  tax  has  been  shifted,  spends  his  income 
in  buying  diamonds,  on  whom  can  he  possibly  shift  the  tax  ? 
Not  on  the  diamond  dealer,  because  he  does  not  stand  in  any 
relation  of  producer  to  the  dealer.  He  may  indeed  buy  fewer 
diamonds  than  he  would  have  bought  if  the  tax  had  not  been 
imposed,  but  he  cannot  shift  the  tax.  The  shifting  of  the 
tax  is  not  the  same  thing  as  the  result  of  the  tax.  What 
is  true  of  the  diamond  purchaser  is  true  of  all  who  consume 
for  purposes  other  than  those  of  production.  So  that  there 
is  no  indefinite  diffusion  of  taxes. 

Only  so  far  as  the  individual  purchases  or  consumes  a  com- 
modity in  order  to  produce  other  commodities  with  it,  will  the 
condition  arise  under  which  he  as  producer  will  be  able  to 
shift  the  tax  proper  on  to  another  consumer.  Here,  again, 
the  possible  conditions  are  not  necessarily  the  actual  facts. 
Just  as  only  some  producers  —  and  even  they  only  under 
certain  circumstances  —  will  be  able  to  shift  the  tax,  so  only 
some  of  the  consumers  (who  must  in  this  respect  be  regarded 
as  producers) — and  they  only  in  part  —  will  be  able  to  shift 
the  tax.  Hence  the  theory  of  the  general  diffusion  of  taxa- 
tion is  untenable,  whether  the  theory  asserts  that  all  taxes  are 
equally  spread  throughout  the  community,  or  that  they  will 
inevitably  rest  at  last  on  some  one  class. 


CHAPTER   VIII 
Conclusion 

We  come  now  to  the  close  of  our  investigation,  and  to  the 
consideration  of  the  question  whether  the  theory  of  incidence 
contains  by  inference  any  advice  for  the  statesman  engaged 
in  framing  a  scheme  of  taxation.  What  is  the  practical 
result  of  our  discussion  ?  What  weight  should  be  attached 
to  theories  of  incidence  in  constructing  a  positive  system  of 
public  contributions  ? 

In  the  first  place,  we  have  seen  that  there  is  no  room  for 
optimism  of  theory.  The  legislator  cannot  rightfully  shut 
his  ears  to  any  cry  for  reform,  on  the  plea  that  all  old  taxes 
tend  to  become  good  taxes.  Nor  dare  he  complacently 
grasp  any  new  source  of  revenue,  on  the  assumption  that 
all  taxes,  no  matter  how  levied,  will  ultimately  be  borne  by 
the  community  at  large.  The  theory  that  "  all  taxes  fall  on 
everybody"  and  are  therefore  just,  is  incorrect  because  it 
assumes  that  all  taxes  are  a  part  of  the  cost  of  production. 
This  assumption  is  untrue,  because  some  taxes  are  levied  on 
persons,  or  property,  or  revenue,  where  there  is  no  further 
relation  of  producer  and  consumer.  Even  if  all  taxes  were 
to  be  regarded  as  additions  to  the  cost  of  production,  it  would 
not  follow  that  the  taxes  would  be  shifted  to  the  consumers 
in  any  definite  proportion  to  their  faculty  or  ability  to  pay, 
which  is  the  only  test  of  justice  in  taxation.  If  all  taxes  did 
really  fall  on  everybody,  taxation  would  be  proportional  to 
expenditure ;  and  expenditure  is,  of  all  bases  of  taxation, 
the  least  equitable.  Thus  the  optimistic  theory  must  be 
discarded :  first,  because  the  general  diffusion  doctrine  is 
untrue ;  and,  second,  because  if  it  were  true,  it  would  cause 

389 


390  Shifting  and  Incidence  of  Taxation 

injustice.  The  legislator  cannot  shirk  his  duty  in  this  easy- 
going way. 

On  the  other  hand,  there  is  no  good  reason  for  pessimism 
or  agnosticism.  Some  writers,  as  we  know,  claim  that  it  is 
useless  to  construct  any  system  of  taxation,  because  it  is  im- 
possible to  foresee  the  ultimate  consequences  of  any  tax. 
But  this  hopeless  attitude  we  have  found  to  be  mistaken.  It 
is  true,  indeed,  that  the  distinction  between  direct  and  indi- 
rect taxes  is  robbed  of  much  of  its  value ;  for  many  of  the 
so-called  direct  taxes  may  be  shifted  in  the  same  way  as 
the  so-called  indirect  taxes.  In  common  parlance  the  dis- 
tinction between  direct  and  indirect  taxes  is  practically  rele- 
gated to  the  mind  of  the  legislator :  what  he  wishes  to  have 
borne  by  the  original  taxpayer  is  called  a  direct  tax,  what  he 
intends  to  have  borne  by  some  one  else  than  the  original 
taxpayer  is  called  indirect.  Unfortunately  the  intention  of 
the  legislator  is  not  identical  with  the  actual  result.  We 
must,  then,  either  revise  our  nomenclature  or  declare  the 
present  distinction  of  little  value. 

While  the  mere  fact  that  a  tax  is  called  a  direct  tax  does 
not  show  that  it  may  not  be  shifted,  the  preceding  discussion 
has  shown  that  certain  general  tendencies  may  be  clearly 
defined.  What  are  these  general  tendencies  of  incidence .'' 
They  may  be  summed  up  under  the  following  heads : 

In  the  first  place  all  taxable  objects  may  be  looked  at  from 
the  standpoint  of  property  or  from  that  of  revenue.  Re- 
garded from  the  former  point  of  view,  we  have  found  that 
unequal  or  partial  taxes  on  revenue-yielding  property  tend 
to  be  a  charge  neither  on  the  community  nor  on  the  future 
possessors,  but  only  on  the  holders  at  the  time  the  tax  is 
imposed.  The  capitalization  theory  comes  into  play  when- 
ever a  new  tax  is  assessed  on  certain  classes  of  property  or 
the  rate  of  an  existing  tax  is  altered.  The  tax  is  never 
shifted  onward,  but  its  results  are  serious,  whether  for  good 
or  for  evil,  to  the  class  of  initial  owners  alone.  The  longer 
the  tax  lasts,  the  greater  will  be  the  number  of  new  purchases 
of  the  class  of  property  in  question ;  so  that,  after  a  time,  the 


Conclusion  391 

existing  owners  will  have  bought,  or  entered  on  the  possession 
of,  the  property  virtually  free  from  all  burden.  The  tax  has 
been  discounted  in  the  purchase  price ;  it  is  completely  ab- 
sorbed, so  to  speak,  in  the  capital  value  of  the  commodity. 

Secondly,  and  this  is  especially  important  in  the  United 
States,  if  a  system  of  taxation  consists  of  a  tax  on  property,  it 
is  not  necessary  to  tax  every  item  of  property  in  order  to 
secure  an  equitable  system  of  taxation.  This  is  due  to  the 
twofold  processes  of  absorption  and  of  diffusion  of  taxation. 
We  have  seen  that  in  many  cases  a  tax  on  a  particular  class 
of  property  will  be  shifted  forward  and  reshifted  until  its  final 
effects  are  diffused  throughout  the  community.  This  is  par- 
ticularly true  of  taxes  on  certain  commodities,  under  special 
conditions,  and  of  taxes  on  certain  classes  of  property, 
like  mortgages.  The  upholders  of  the  old  diffusion  theory 
were  correct  in  their  analysis  so  far  as  they  went ;  their  weak- 
ness consisted  in  the  fact  that  they  went  too  far,  and  that  they 
applied  to  taxes  in  general  what  is  true  only  of  certain  taxes, 
and  that,  too,  only  under  certain  conditions.  There  is,  as  we 
have  seen,  no  such  thing  as  a  general  diffusion  of  all  taxation  ; 
but  there  is  assuredly  such  a  thing  as  the  diffusion  of  some 
taxes  under  certain  conditions. 

When  a  property  tax  is  imposed  on  the  constituent  classes 
of  property  in  such  a  way  that,  as  is  always  the  fact,  it  falls 
unequally  on  the  different  classes  of  property,  it  will  be  dif- 
fused in  certain  cases,  and  will  naturally  not  be  diffused  in 
other  cases.  If,  however,  it  is  not  dififused,  that  is  if  it  rests 
on  the  property  owner  so  as  to  impose  on  him  a  burden  which 
is  not  shared  by  the  owners  of  other  classes  of  property,  we 
are  at  once  confronted  by  the  process  of  capitalization  or  ab- 
sorption mentioned  in  the  last  paragraph.  We  know,  how- 
ever, that  if  a  tax  is  capitalized,  it  will  not  ultimately  fall  on 
the  new  owner  or  purchaser  of  the  commodity,  but  will  be 
absorbed  into  the  selling  price.  We  therefore  arrive  at  this 
most  significant  conclusion.  Where  individual  items  or  classes 
of  property  are  taxed  in  such  a  way  that  they  are  not  all 
actually    assessed  at  the  same  rate,  the    tax    will  be  cither 


392  Shift i?ig  and  Incidence  of  Taxation 

diffused  or  absorbed.  This  joint  process  of  diffusion  and 
absorption  of  taxation  results  in  what  may  be  termed  the 
elision  or  final  disappearance  of  taxation.  The  tax  is  elided, 
or  disappears  as  a  burden  upon  the  tax  payer.  Thus  if  a 
special  tax  is  imposed  on  real  estate,  the  tax  on  houses  may 
be  shifted  to  the  tenant  and  ultimately  diffused  to  the  com- 
munity ;  while  the  tax  on  land  may  rest  on  the  landowner  and 
be  absorbed  into  the  lower  purchase  price  paid  by  the  new 
owner. 

The  practical  consequence  of  the  elision  theory  of  taxation 
is  that  it  is  unnecessary,  in  order  to  secure  justice  in  taxation, 
that  every  individual  item  of  property  be  taxed.  Within  each 
class  of  property  holders,  every  one,  indeed,  should  be 
assessed  ;  but  as  between  classes  of  property,  economic  forces 
will  bring  about  a  readjustment.  The  process  is  often  a  pain- 
ful one,  and  in  order  to  injure  the  present  owners  as  little  as 
possible,  great  care  must  be  observed  in  altering  existing 
methods.  But  the  ideal  of  imposing  taxes  on  property  rather 
than  upon  individual  property  owners,  must  be  constantly 
kept  in  mind.  The  attempt  in  the  United  States  to  assess 
every  person  upon  all  his  property  creates  gross  injustice, 
because  by  our  hit-or-miss  system  some  individuals  in  a  given 
class  are  assessed  and  some  escape.  Those  that  escape  are 
generally  the  wealthy  ;  those  that  are  reached  are  for  the  most 
part  the  ones  who  cannot  afford  to  pay.  The  general  property 
tax  thus  practically  results  in  a  travesty  of  justice.  When 
we  abandon  the  impracticable  attempt  to  tax  all  property 
owners  alike,  and  when,  realizing  that  taxation,  like  value,  is 
a  social  phenomenon,  we  learn  to  tax  some  kinds  of  property 
rather  than  all  kinds  of  individuals,  we  shall  have  made  a  great 
stride  forward  in  practical  as  well  as  theoretical  justice.  It  is 
a  process  which  is  now  slowly  going  on  in  the  more  advanced 
industrial  communities  of  America.  But  few  reaUze  that  the 
tendency  is  a  corroboration  of  the  theory  that  the  diffusion 
and  the  absorption  of  taxation  result  in  the  elision  of  taxation. 

In  modern  life,  however,  property  taxes  by  no  means  ex- 
haust the  categories  of  taxation.     On  the  contrary,  in  most 


Conclusion  393 

countries  except  in  the  United  States,  the  tendency  is  to 
impose  taxes  on  classes  of  income  rather  than  on  classes  of 
property.  Since  income  is  derived  from  other  sources  as  well 
as  from  property,  the  problems  are  somewhat  different,  and 
present  the  following  considerations :  — 

In  the  first  place,  if  we  look  at  taxable  objects  from  the 
standpoint  of  revenue,  we  have  found  that  there  are  only  two 
kinds  of  revenue  on  which  a  tax,  when  once  imposed,  neces- 
sarily remains.  These  arc  the  pure  differential  rent  of  the 
older  economists  and  pure  profits,  or,  to  use  a  term  which  has 
sometimes  been  adopted  to  include  both  elements,  economic 
surplus.  A  tax  on  surplus  can  never  be  shifted,  because  sur- 
plus is  not  a  part  of  cost  of  production,  but  the  result  of 
process  of  production.  Thus,  taxes  on  inheritance,  gifts,  gains 
from  speculation,  etc.,  cannot  be  shifted,  because  they  are  a 
part  of  surplus,  of  pure  profits.  If  it  were  possible,  then,  to 
find  a  class  whose  revenue  consisted  exclusively  of  economic 
rent  and  pure  profits,  the  legislator  might  single  out  this  class 
either  for  taxation  or  for  exemption,  according  as  it  was  the 
general  policy  to  have  taxes  paid  directly  or  indirectly.  As 
a  matter  of  fact,  however,  such  a  class  does  not  exist.  ^ 

*  The  distinction  made  between  taxes  on  costs  and  on  surplus  has  recently 
been  elaborated  by  J.  A.  llobson,  Taxation  in  the  New  State  (1919).  lie  de- 
fines costs,  however,  somewhat  differently  as  "  those  elements  of  income  which 
are  necessary  payments  to  owners  of  productive  agents,  in  order  to  sustain  the 
productive  efficiency  of  an  agent  and  to  evoke  its  application"  (p.  41).  This 
would  include  "  standard  wages,"  "  such  salaries,  fees  and  profits  as  are  necessary 
to  secure  the  supply  of  the  requisite  amounts  of  business  and  professional  ability 
needed  for  the  initiation,  organization  and  management  of  productive  enterprise," 
and  "the  minimum  interest  required  to  evoke  the  amount  of  saving  and  the 
application  of  new  capital  needed  to  furnish  the  plant,  tools  and  materials  for  the 
productive  processes."  On  the  other  hand,  "surplus"  includes  "all  economic 
rents  of  land,"  "all  interest,  profits  and  other  payments  for  the  use  of  capital, 
brains  or  labor  which  are  due  to  superior  economic  opportunities  and  are  not 
necessary  incentives  to  secure  such  use."  Taxes  on  costs  are  shifted;  taxes  on 
surplus  are  non-shiftable. 

Ina.smuch,  however,  as  Mr.  Hobson  concedes  that  there  is  no  way  of  directly 
ascertaining  such  elements  of  surplus  in  the  existing  shares  of  distribution,  it  is 
difficult  to  see  what  light  his  analysis  sheds  on  the  general  problem  of  incidence. 
Even  as  a  plan  of  practical  tax  reform  his  suggestion  is  not  much  better.     Dc« 


394  Shifting  and  Incidence  of  Taxation 

In  the  second  place,  all  remaining  taxes  tend,  in  the  ab- 
stract, to  be  shifted,  until  they  fall  ultimately  on  the  surplus, 
because  all  other  taxes  tend  to  form  a  part  of  cost  of  produc- 
tion. The  conclusion  might,  therefore,  be  drawn  that  taxes 
should  be  levied  either  on  net  profits  alone  or  on  commodi- 
ties—  in  the  latter  case,  falling  in  the  long  run  on  profits, 
but  without  the  knowledge  of  the  profit-receiver.  In  either 
case,  taxes  on  wages  would  be  regarded  as  part  of  the  cost  of 
production,  and  would  be  shifted  from  wages  to  profits. 

Such  conclusions  rest  on  doctrines  very  like  those  that  we 
discussed  under  the  head  of  "absolute  theories."  They  tend 
to  be  true  only  in  an  isolated  community  where  there  is  com- 
plete mobility  of  labor  and  capital,  and  where  the  economic 
man  reigns  supreme.  In  actual  life,  these  tendencies  are 
met  by  the  counter-tendencies  of  "economic  friction." 
Taxes  on  land  often  tend  to  stay  where  they  are  put, 
because  of  international  relations  and  the  lack  of  absolute 
transferability  of  capital ;  taxes  on  wages,  if  cunningly  im- 
posed, may  lead  to  a  lowering,  instead  of  to  a  heightening, 
of  the  standard  of  life ;  taxes  on  occupiers  of  houses  are  not 
necessarily  shifted  to  the  owners ;  and  so  on. 

Thirdly,  above  all,  we  must  distinguish  between  kinds  of 
revenue  and  classes  of  society.  Economic  surplus  may  mean 
the  entire  revenue  of  some  individuals,  but  only  part  of  the 
revenue  of  others.  As  we  have  already  pointed  out,  the  mere 
fact  that  a  tax  may  be  shifted  by  a  class  does  not  show  that 
the  tax  may  not  press  very  unequally  upon  individual  mem- 
bers of  the  class.  If  we  thus  change  the  point  of  view  from 
social  classes  to  individuals,  we   see   how   untenable  is  the 

spairing  of  any  taxation  exactly  proportioned  to  surplus,  he  accepts  a  general 
progressive  income  tax  with  the  addition  of  an  inheritance  tax.  But,  as  J.  C. 
Stamp  points  out  in  "The  Special  Taxation  of  Business  Profits,"  The  Economic 
Journal,  xxix  (1919),  419-423,  there  is  no  assurance  that  "  surplus  "  will  or  can  be 
successfully  reached  by  a  progressive  income  tax.  Mr.  Stamp's  own  suggestion 
that  the  American  excess-profits  tax  comes  nearer  than  any  other  to  "  reach  the 
profit  surplus,  which  is  the  bulk  of  all  surplus  "  will  scarcely  be  accepted  by 
those  who  are  acquainted  with  the  practical  shortcomings  of  the  tax  as  actually 
administered. 


Conclusion  395 

argument  that  the  best  tax  is  an  indirect  tax,  because  it  will 
ultimately  be  shifted  to  the  economic  surplus  of  society. 
For  such  a  tax  can  get  to  economic  surplus  only  through  the 
productive  consumption  of  individuals  —  that  is,  through 
expenditures  which  again  create  relations  of  producer  and 
consumer.  But  as  we  have  just  pointed  out,  not  all  con- 
sumption is  productive  consumption ;  and  expenditure  in 
general  is  the  least  equitable  basis  of  taxation,  because  it 
always  bears  with  greater  weight  upon  the  less  fortunate 
or  more  deserving  members  of  any  social  class. 

The  advice,  therefore,  which  the  correct  theory  of  inci- 
dence has  to  offer  to  the  legislator  is  :  Choose  primarily  those 
taxes  the  results  of  which  can  be  foretold  with  some  degree  of 
accuracy ;  at  all  events,  take  some  taxes  where  the  chances 
of  shifting  are  very  slight,  and  take,  on  the  other  hand,  taxes 
which  will  be  shifted  in  their  entirety.  In  the  former  class 
are  included  certain  taxes  on  monopolies,  net  profits,  inher- 
itances and  definite  forms  of  property  and  income.  In  the 
latter  class  are  included  taxes  on  commodities  in  the  shape 
of  import  duties,  certain  excise  taxes  and  licenses,  and  taxes 
on  gross  receipts  of  corporations.  If  the  legislator  desires 
to  reach  certain  classes  of  society  directly,  let  him  choose  the 
first  kind  of  taxes ;  if  he  desires  to  have  his  taxes  paid  un- 
awares, let  him  choose  the  second.  If  neither  the  one  nor  the 
other  kind  of  taxes  suffices  for  the  public  revenue,  the  legis- 
lator will  be  compelled,  as  is  often  the  case,  to  resort  to  taxes 
the  incidence  of  which  is  more  uncertain  and  where  the 
intentions  of  the  legislator  may  be  entirely  frustrated  by 
the  actual  course  of  events. 

The  theory  of  incidence  has  therefore  important,  but  by 
no  means  final,  advice  to  offer  in  the  elaboration  of  a  tax 
system.  It  does  not  by  any  means  render  unnecessary  the 
study  of  the  principles  of  justice  and  equality  in  taxation. 
If  neither  the  optimistic,  nor  the  pessimistic,  nor  the  agnostic 
theory  of  incidence  can  be  any  longer  upheld,  the  student  of 
public  finance  must  seek  to  elaborate  the  rules  of  equitable 
taxation  without  any  reliance  upon  the  automatic  operation 


396  Shifting  and  hicidence  of  Taxation 

of  presumed  absolute  laws.  He  must  endeavor  to  make  a 
choice  of  public  revenues  which  in  themselves  satisfy  the 
requirement  of  the  principles  of  economic  justice;  and  in  so 
doing  he  may  be  guided  by  those  principles  of  incidence, 
but  only  by  those,  which  are  definite  and  well  ascertained. 
The  theory  of  shifting  of  taxation  is,  therefore,  an  aid  to,  but 
not  a  substitute  for,  the  study  of  economic  justice.  As  has 
been  well  said,  the  doctrine  of  incidence  is  neither  the  arch- 
angel nor  the  archfiend  of  the  science  of  finance. 


BIBLIOGRAPHY 


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A.   Signed  Works 

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Ashley,  John.     See  The  Sugar  Trade,  etc.,  1734. 

Ashley,  John.     See  Some  Observations,  etc.,  1735. 

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Boisguilbert,  Pierre  le  Pesant  de.     Detail  de  la  France.     Paris,  1697. 

Brooks,  John.     A  short  Treatise  for  reducing  the  Duty  on  Starch.     London, 

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Brooks,  John.  England's  Interest:  or  Free  Thoughts  on  the  Starch  Duty. 
Wherein  is  set  forth  the  Advantages  that  will  attend  the  Farmers  and 
Landholders ;  and  also  some  Observations  relating  to  the  Powder,  and 
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Member  of  the  Honourable  House  of  Commons.  Dedicated  to  the  Hon. 
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Bumaby,  A.  Two  Proposals  Humbly  Offered  to  the  Honourable  House 
of  Commons,  now  assembled  in   Parliament.     I.   That  a  Duty  be  laid 

399 


4CX)  Shifting  and  Incidence  of  Taxation 

on  Malt,  in  the  stead  of  the  present  Duty  on  Beer  and  Ale.  II.  That 
a  Duty  be  laid  on  Malt,  and  the  present  Duty  on  Beer  and  Ale  be  con- 
tinued.    London,  1696. 

Burnaby,  A.  An  Essay  upon  the  Excising  of  Malt,  as  also  the  present 
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Cary,  John.  An  Essay  on  the  State  of  England  in  relation  to  its  Trade,  its 
Poor  and  its  Taxes,  for  carrying  on  the  present  War  against  France. 
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C,  W.,  Esq.  A  Discourse  (by  way  of  Essay)  humbly  offered  to  the  Consid- 
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Moneys  by  an  Excise,  demonstrating  the  Conveniency  of  Raising  Moneys 
that  Way.     London,  1695-6. 

C,  W.     Trades  Destruction  is  Englands  Ruine  or  Excise  decry ed.   Wherein 

is  manifested  the  Irregularity  and  Inequality  of  raising  money  by  way 
of  Excise  to  defray  the  Charge  of  the  Nation.  By  W.  C,  a  Lover  of 
his  Country.     London,  1659. 

Chamberlayne,  Edward.     See  England's  Wants,  etc.,  1667. 

C(hild),  J(osiah).  Brief  Observations  concerning  Trade  and  Interest  of 
Money.     London,  1688. 

Child,  Josiah.     See  A  Discourse  about  Trade,  etc.,  1690. 

Cradock,  Francis.  An  Expedient  for  Regulating  the  Customes  and  Excise. 
Approved  by  divers  well  affected  Marchants,  and  others  of  the  Citty  of 
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Culpeper,  Sir  Tho.,  Jun.  Kt.  A  Discourse  shewing  the  many  Advantages 
which  will  accrue  to  this  Kingdom  by  the  Abatement  of  Usury,  together 
with  the  Absolute  necessity  of  Reducing  Interest  of  Money  to  the  lowest 
rate  it  bears  in  other  Countreys,  that,  at  least,  we  may  Trade  with  our 
Neighbours  upon  Equal  Termes.  Humbly  presented  to  the  High  Court 
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Culpeper,  Sir  Thomas,  Jun.  Kt.  The  Necessity  of  Abating  Usury  re- 
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inoffensive  way  propounded  for  the  future  Discovery  of  Summes  at  In- 
terest, that  they  may  be  charged  with  their  equal  shares  of  Publick  Taxes 
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Cunningham,  J.     See  An  Essay  on  Trade  and  Commerce,  etc.,  1770. 

D.  A.     Proposals  to  Supply  His  Majesty  with  Twelve  or  Fourteen  Millions 

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402  Shifting  and  Incidence  of  Taxation 

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4o6  Shifting  and  Incidejice  of  Taxation 

B.  Anonymous  Works 
(Arranged  Chronologically) 

Restauranda:  or  the  Necessity  of  Publick  Repairs,  by  selling  of  a  certain 
and  Royal  yearly  Reveniie  for  the  King.  [By  Fabian  Philips.]  Lon- 
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England's  Wants  or  several  Proposals  probably  Beneficial  for  England, 
humbly  offered  to  the  Consideration  of  all  good  Patriots  in  both  Houses 
of  Parliament.  By  a  true  Lover  of  his  Country.  [Edward  Chamber- 
laync.]     London,  1667. 

England's  Interest  Asserted  in  the  Improvement  of  its  Native  Commodities ; 
and  more  especially  the  Manufacture  of  Wool.  By  a  true  Lover  of  his 
Majesty  and  Native  Country.     London,  i66g. 

A  familiar  Discourse  between  George,  a  true-hearted  English  Gentleman, 
and  Hans,  a  Dutch  Merchant:  Concerning  the  present  affairs  of  Eng- 
land.    London,  1672. 

The  Grand  Concern  of  England  explained;  in  several  Proposals  offered  to 
the  Consideration  of  the  Parliament.  By  a  Lover  of  his  Countrey  and 
Well-wisher  to  the  Prosperity  both  of  the  King  and  Kingdoms.  Lon- 
don, 1673. 

A  Discourse  on  the  Rise  and  Power  of  Parliaments,  of  Laws,  of  Courts  of 
Judicature,  of  Liberty,  Property,  and  Religion,  of  Taxes,  Trade  and 
of  the  Interest  of  England  in  Reference  to  France.  In  a  Letter  from  a 
Gentleman  in  the  Country  to  a  Member  of  Parliament.  [By  Thomas 
Sheridan.]  London,  1677.  [Reprinted  as  a  separate  volume  in 
Some  Revelations  in  Irish  History,  or  Old  Elements  of  Creed  and  Class 
Conciliation  in  Ireland.     Edited  by  Saxe  Bannister.     London,  1870.] 

Reasons  for  a  Limited  Exportation  of  Wooll.     London,  1677. 

Britannia  Languens,  or  a  Discourse  of  Trade:  shewing  the  Grounds  and 
Reasons  of  the  Increase  and  Decay  of  Land-Rents,  National  Wealth 
and  Strength,  etc.,  etc.     London,   1680. 

The  Groans  of  the  Plantations:  or,  a  true  Account  of  their  Grievous  and 
Extreme  Sufferings  by  the  Heavy  Impositions  upon  Sugar,  and  other 
Hardships,  etc.     London,  1689.     Reprinted  in  1698. 

A  Discourse  about  Trade,  wherein  the  Reduction  of  Interest  of  Money  to 
4  per  Centum  is  Recommended,  etc.  Never  before  Printed.  [By 
Josiah  Child.]  London,  1690.  2d  ed.,  1693,  ^^  well  as  subsequent 
editions,  entitled  A  New  Discourse  of  Trade. 

Taxes  no  Charge:  in  a  Letter  from  a  Gentleman,  to  a  Person  of  Quality. 
Shewing  the  Nature,  Use,  and  Benefit  of  Taxes  in  this  Kingdom;  and 
compared  with  the  Impositions  of  Foreign  States.     London,  1690. 

A  Letter  from  a  Gentleman  in  the  Country  to  his  Friend  in  the  City :  touching 


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Sir  William  P city's  Posthumous  Treatise;  entituled  Verbum  Sapienti, 
etc.     [By  Sir  Thomas  Culpeper.]     London,    1691. 

A  Plain  and  Easie  Way  for  the  Speedy  Raising  of  Money  to  supply  their 
Majesties  Present  Occasions:  which  will  also,  very  much  tend  to  the 
Advancing  the  Value  of  Lands.  By  a  Divine  of  the  Church  of  Eng- 
land.    London,  1691. 

A  Proposal  far  an  Equal  Land-Tax,  humbly  submitted  to  Consideration. 
London,  1691. 

An  Essay  upon  Taxes,  calculated  for  the  Present  Juncture  of  Affairs  in 
England.     [By  Sir  William  Temple.]    London,   1693. 

An  Essay  upon  Ways  and  Means  of  supplying  the  War.  [By  Charles 
Davenant.]     London,  1695. 

To  the  Honourable  the  Knights,  Citizens  and  Burgesses  of  the  House  of 
Commons  in  Parliament  assembled.  Proposals  most  humbly  offered 
for  Raising  {in  all  Likelyhood)  upwards  of  Five  Millions  of  Money, 
without  Charging  the  Poor,  or  Burthening  the  Rich,  by  such  Ways 
and  Means,  that  {for  the  greatest  part  thereof)  the  Payers  will  volun- 
tarily  Tax  themselves.     [By  J.   M.]     London,   1696. 

An  Essay  upon  Projects.     [By  Daniel  De  Foe.]     London,  1697. 

Discourses  on  the  Publick  Revenues  and  of  the  Trade  of  England.  [By 
Charles  Davenant.]     London,  1698. 

An  Essay  upon  the  Probable  Means  of  making  a  People  Gainers  in  the 
Ballance  of  Trade.  By  the  author  of  the  Essay  on  Ways  and  Means. 
[Charles  Davenant.]    London,  1699. 

The  Mischief  of  the  Five  Shillings  Tax  upon  Coal,  is  Here  humbly  Repre- 
sented, That  this  Tax  is  Inconsistent  with  the  Safety  of  England, 
Partial  upon  the  Poor,  Pernicious  to  our  Shipping,  and  Seamen,  Destruc- 
tive of  our  River-Men,  viz.  Boat-Men,  Keel-Men,  Barge-Men,  Ballast- 
Men,  Coal-heavers,  b'c.  Fatal  to  our  Manufactures  made  with  Sea- 
Coal;  especially  Salt,  Glass,  and  all  sorts  of  Gross  Ironwork;  {that  by 
this  Tax  must  be  Run  into  the  Coal  Countries,  or  out  of  the  Kingdom,) 
and  highly  Injurious  to  His  Majesties  Revenue.     London,   1699. 

An  Essay  concerning  the  Necessity  of  Equal  Taxes;  and  the  Dangerous 
Consequences  of  the  Encouragement  given  to  Usury  among  us  of  late 
Years.  With  some  Proposals  to  promote  the  Former  and  give  a  check 
to  the  Latter.  By  the  author  of  The  History  of  the  Last  Parliament. 
[Probably  James  Drake.]  London,  1702.  [This  work  appeared  with 
the  same  title  again  in  1704.] 

A  Short  View  of  our  present  Trade  and  Taxes  compared  with  what  these 
Taxes  may  amount  to  after  the  Union.  With  some  Reasons  why  {if 
we  enter  in  an  Union,)  our  Trade  should  be  under  our  own  Regulations. 
[By  Daniel  De  Foe?]     London,    1706. 


4o8  Shifting  and  Incidence  of  Taxation 

Proposals  for  a  very  Easie  Tax  to  raise  between  Two  and  Three  Millions  of 
Money  per  Annum,  {if  not  a  greater  Sum)  in  the  room  of  the  Land-Tax, 
to  begin  to  pay  the  Publick  Debts,  and  to  discharge  this  Nation  not  only 
from  all  those  Taxes  that  these  Two  late  expensive  Wars  have  loaded 
Us  with,  but  from  all  other  Taxes  that  are  paid  to  Her  Majesty,  in  a 
few  years'  time,  with  other  happy  Consequences,  that  will  accrue  to  the 
Kingdom  in  general,  if  it  should  be  laid  on  and  continued.  Also  Pro- 
posals for  the  further  Encouraging  the  Woollen- Manufactures  of  this 
Kingdom  in  foreign  Parts.     [By  Ephraim    Parker.]     London,    1713. 

A  Proposal  for  the  Payment  of  the  Publick  Debts,  and  an  Account  of  some 
Things  mentioned  in  Parliament  on  that  Occasion.     London,  1714. 

A  Letter  to  a  Member  of  Parliament,  shewing  the  Justice  of  a  more  equal 
and  impartial  Assessment  on  Land:  the  Sacredness  of  Publick  En- 
gagements: the  Advantages  of  lowering  the  Customs  and  high  Duties 
on  Trade:  and  the  Ease  of  reducing  by  Degrees  the  Debts  of  the  Nation. 
[By  William  Wood?]     London,  171 7. 

Fair  Payment  no  Spunge:  or  some  Considerations  on  the  Unreasonableness 
of  Refusing  to  receive  back  Money  lent  on  Publick  Securities.  And 
the  Necessity  of  Setting  the  Nation  Free  from  the  Insupportable  Bur- 
then of  Debt  and  Taxes.     London,  171 7. 

The  State  and  Condition  of  our  Taxes  considered;  or  a  Proposal  for  a 
Tax  upon  Funds:  shewing  the  Justice,  Usefulness,  and  Necessity  of 
such  a  Tax,  in  respect  to  our  Trading  and  Landed  Interest,  etc.  By  a 
Freeholder.     [By  William  Wagstaffe  ?]     London,  1 714. 

Animadversions  and  Observations  upon  a  Treatise  entituled  Some  Calcu- 
lations and  Remarks  relating  to  the  present  State  of  the  publick  Debts 
and  Funds.  .  .  .  by  Archibald  Hutcheson  .  .  .  to  which  is  added 
a  New  Proposition  to  raise  Money  for  the  Use  of  the  Publick.  Humbly 
submitted  to  the  Consideration  of  both  Houses  of  Parliament,  etc.  Lon- 
don, 1 718. 

The  Grasiers'  Complaint  and  Petition  for  Redress:  or  the  Necessity  of 
Restraining  Irish  Wool  and  Yarn;  and  of  Raising  and  Supporting 
the  Price  of  Wool  of  the  Growth  of  Great  Britain  considered.  By  a 
Lincolnshire  Grasier.     London,  1726. 

A  Letter  to  a  Country  Gentleman  on  the  Revenue  of  the  Salt  Duty.     London, 

1732- 
A  Letter  to  a  Freeholder  on  the  Late   Reduction  of  the   Land  Tax  to  One 

Shilling  in  the  Pound.     By  a  Member  of  the  House  of  Commons. 

London,  1732. 
A  Scheme  plainly  demonstrating  how  several  Hundred  Thousand  Pounds 

may  be  rais'd  Yearly  to  the  Government  without  officers  to  collect  it, 

without  oppression  to  the  Poor,  without  hurting  Trade  and  without  any 


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A  Letter  from  a  Member  of  Parliament  for  a  Borough  in  the  West,  to  a  Noble 
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A  Letter  from  a  Member  of  Parliament  to  his  Friends  in  the  Country  con- 
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A  Letter  from  a  Merchant  of  London  to  a  Member  of  Parliament,  in 
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A  Letter  to  the  Freeholders  of  Great  Britain.     London,  1733. 

An  Answer  to  the  Considerations  occasioned  by  the  Craftsman  upon  Excise, 
so  far  as  it  relates  to  the  Tobacco  Trade.     London,  1733. 

An  Appeal  to  the  Landholders  concerning  the  Reasonableness  and  General 
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4IO  Shifting  and  htcidence  of  Taxation 

An  Impartial  Enquiry  into  the  Present  Question  concerning  Excise,  in  which 
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1733- 
A  Review  of  the  Excise  Scheme;  in  answer  to  a  Pamphlet,  intitled  the  Rise 

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A  Word  to  the  Freeholders  and  Burgesses  of  Great  Britain,  being  Season- 
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the  Excise  Bill,  and  yet  re-electing  them  after  their  being  rewarded  with 
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Considerations    occasioned   by   the   Craftsman   upon    Excises.      London, 

1733- 

Englishmen's  Eyes  open'd:  or  all  made  to  See,  who  are  not  resolved  to  be 
Blind:  Being  the  Excise  Controversy  set  in  a  new  Light;  completely 
discussed  upon  the  just  Principles  of  Reasoning,  and  brought  to  a  fair 
and  demonstrative  Conclusion:  between  a  Landlord  and  a  Merchant. 
London,  1733. 

Excise:  being  a  Collection  of  Letters  etc.  containing  the  Sentiments  and 
Instructions  of  the  Merchants,  Traders,  Gentry  and  Inhabitants  of  the 
principal  Cities,  Counties,  Towns  and  Boroughs  in  England  to  their 
Representatives  in  Parliament.     London,  1 733. 

Reflections  upon  a  Pamphlet  entitled  Observations  upon  the  Laws  of  Excise. 
London,  1733. 

Some  General  Considerations  concerning  the  Alteration  and  Improvement 
of  Publick  Revenues.     [By  Sir  Robert  Walpole.]     London,   1733. 

Som,e  Observations  on  National  Treaties  etc.  An  impartial  Inquiry  into 
the  present  Question  concerning  Excise,  in  which  the  Advantages  aris- 
ing to  the  King  and  Subject  from  raising  Duties  by  Excise  are  demon- 
strated and  the  Objections  thereto  obviated.     London,  1733. 

Some  Observations  upon  a  Paper  intituled.  The  List.  That  is,  of  those 
who  Voted  for  and  against  the  Excise-Bill.     London,  1733. 

Some  seasonable  Animadversions  on  Excises  occasioned  by  a  Pamphlet 
lately  published,  entitled:  Considerations  occasioned  by  the  Craftsman. 
London,  1733. 

The  Budget  opened;  or  an  Answer  to  a  Pamphlet  intitled  A  Letter  from 
a  Member  of  Parliament  to  his  Friends  in  the  Country,  concerning  the 
Duties  on  Wine  and  Tobacco.     London,  1733. 

The  Golden  Fleece.  To  which  is  added,  a  Proposal  for  taking  away  many 
burthensome  Duties  on  some  of  the  most  essential  Necessaries  in  Life, 
viz.  Leather,  Soap,  Candles,  &'c.     London,  1733. 


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on  Wine  and  Tobacco,  .  .  .  with  a  General  Examination  of  the  Reasons 

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1734- 

The  late  Excise  Scheme  dissected:  or,  an  exact  copy  of  the  late  Bill  for  Re- 
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412  Shifti7ig  and  hicidence  of  Taxation 

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Considerations  against  laying  any  New  Duty  upon  Sugar,  wherein  is  par- 
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Colonies,  insufficient  for  the  Purposes  intended,  and  greatly  conducive 
to  the  Aggrandizement  of  France.     London,  1744. 

Pro  Commodo  Regis  et  Populi.  Publick  Funds  for  Publick  Service  by 
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and  Ability,  without  Charge  of  Collecting,  or  affecting  Land  or  Trade, 
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Considerations  relating  to  the  laying  any  additional  Duty  on  Sugar  from  the 
British  Plantations,  wherein  is  shown  that  such  Duty  will  be  injurious 
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Reasons  grounded  on  Facts  shewing  that  a  new  Duty  on  Sugar  must  fall 
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Considerations  upon  a  Reduction  of  the  Land  Tax.  [By  Robert  Nugent.] 
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414  Shifti7tg  and  Incidence  of  Taxation 

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SUPPLEMENTARY   LIST 

(For  fourth  edition) 
A.   Signed  Works 

Adams,  Thomas  S.,  "Tax  Exemption  through  Tax  Capitalization."     In 

The  American  Economic  Review,  vi  (1916),  pp.  271-287. 
Barone,  Enrico,  "  La  Traslazione  delle  Imposte"  in  "Studi  di  economia 

finanziaria."     In  Giornale  degli  Economisti,  xiv  (191 2). 
Bickerdike,  C.  F.,  "The  Principles  of  Land  Value  Taxation."     In  The 

Economic  Journal,  xxii  (1912). 
Brand,  J.,  The  Alteration  of  the  Constitution  of  the  House  of  Commons 

and  the  Inequality  of  the  Land  Tax  considered  conjointly.     London, 

1793- 

Bricknock,  T.,  A  Treatise  upon  Perennial  Ways  and  Means  with  other 
Political  Tracts  inscribed  to  the  King.     London,  1762. 

Davenport,  H.  J.,  "Theoretical  Issues  in  the  Single  Tax."  la  The  Ameri- 
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Einaudi,  Luigi,  Osservazioni  critiche  intorno  alia  teoria  dell'  ammorta- 
mento  dell'  imposta  e  teoria  delle  variazioni  nei  redditi  e  nei  valori 
capitate  susseguenti  all'  imposta.     Turin,  1919. 

Frend,  William,  Principles  of  Taxation.     London,  1799. 

Frend,  William,  Principles  of  Taxation  or  Contribution  according  to 
Means.     London,  1804. 

Friday,  David,  "Prices  and  Excess  Profits  Taxes."  In  Annals  of  the 
American  Academy  of  Political  and  Social  Science,  vol.  89,  1920, 
161-169. 

Friday,  David,  Wages,  Profits,  and  Prices.     1920. 

Griziotti,  Benvenuto,  "Teoria  dell' ammortamento  delle  imposte  e 
sue  applicazioni. "  In  Giornale  degli  Economisti,  1918,  and  sepa- 
rately. 

Haig,  R.  M.,  "Tax  Exemption  through  Tax  Capitalization."  In  Bulle- 
tin of  the  National  Tax  Association,  ii.  1916-17,  pp.  198-200. 

Haig,  R.  M.,  "The  Taxation  of  Excess  Profits  in  Great  Britain." 
American  Economic  Review,  Supplement,  1920. 

42s 


426  Supplementary  List 

Hamdcn,  John,  Some  Considerations  about  the  most  proper  Way  of  rais- 
ing Money  in  the  present  conjunction.     1692. 

Hayes,  H.  G.,  "Tax  Exemption  through  Tax  Capitalization."  In  Bulle- 
tin of  the  National  Tax  Association,  ii,  1916-17,  pp.  69-73. 

Hayes,  H.  G.,  "The  Capitalization  of  the  Land  Tax."  In  Quarterly 
Journal  of  Economics,  xxxiv  (1920). 

Heron,  Denis  Caulfield,  Three  Lectures  on  the  Principles  of  Taxation 
delivered  at  Queen^s  College,  Galway,  in  Hilary  term,  1850.  Dublin, 
1850. 

Hobson,  J.  A.,  Taxation  in  the  New  State.     London,  1919. 

Jarach,  Cesare,  "  Gli  effetti  di  una  imposta  generale  ed  uniforme  sui 
profitti."  In  Atti  delta  Reale  Accademia  delle  Scienze  di  Torino, 
xlvi  (191 1),  pp.  28  et  seq. 

Kopp,  H. ,  "  1st  die  Wertzuwachssteuer  iiberwalzbar  ?  "  In  Finanzarchiv, 
xxxii  (1906),  1-12. 

Mildschuh,  W.,  "  Ueber  die  Wirkiingen  der  Erwerbsteuer  auf  dieosterr. 
Kreditbanken  und  Vorschusskassen."  In  S talis tische  Monatschrift, 
1912,  pp.  151-241. 

Plehn,  C.  C,  "A  Study  of  the  Incidence  of  an  Increment  Value  Land 
Tax."  In  Quarterly  Journal  of  Economics,  xxxii  (1918),  pp.  487- 
506. 

Polhill,  Nath.,  Reflections  on  the  present  Conduct  of  the  Populace  re- 
lating to  the  Government,  particularly  the  Prime  Minister ;  and  the 
late  Motion  for  a  new  Excise.     London,  1733. 

Pope,  Simeon,  Interesting  Suggestions  to  Proprietors  and  Trustees  of 
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don, 1798. 

Scheftel,  Y.,  The  Taxation  of  Land  Value.     1916. 

Scott,  John,  A  Letter  to  the  Right  Honorable  Chancellor  of  the  Exchequer 
on  his  Proposed  Sale  of  the  Land  Tax.     London,  1798. 

Stamp,  J.  C,  "The  Incidence  of  Increment  Duties."  In  The  Economic 
Journal,  xiii  (19 13). 

Stamp,  J.  C,  "The  Special  Taxation  of  Business  Profits."  In  Tfie 
Economic  Journal,  xxix  (1919). 

Watts,  Jeremiah,  An  Answer  to  Quaeries  Touching  Reducement  of  the 
Excise  to  the  Customes.     1653. 

Weyermann,  P.,  "Die  Ueberwalzungsfrage  bei  der  Wertzuwachssteuer. " 
In  Annalen  des  Deutschen  Reichs.     1910. 


Supplementary  List  427 

B.   Anonymous  Works 

The  Standard  of  Equality  in  Subsidiary  Taxes  and  Payments  or  a  Just 

and  Strong  Preserver  of  Publique  Liberty.     London,  1647. 
A  short  Account  of  Excises.     1650. 

Quaeries  Touching  Reducement  of  the  Excise  to  the  Customes.     1653. 
A  Whippe  for  the  Customes-house  Curre  or  a  Survey  of  Jeremiah  Watts 

his  scurrilous  Pamphlet.     1653. 
A  Way  to  catch  the  Usurer  and  to  lay  the  Taxes  on  those  that  are  best  able 

to  bear  them.     London,  1689. 
Dr.  Davenant's  Opinion  Anent  the  Salt  and  Malt  Taxes  in  England. 

London,  1706. 
The  Taxes  not  Grievous  and  therefore  not  a  Reason  for  an  Unsafe  Peace. 

London,  1712. 
The  Nature  and  Weight  of  the  Taxes  of  the  Nation  :  shewing  that,  by  the 

continuaiwe  of  Heavy   Taxes  and   Impositions,  Trade  is  destroyed 

the  Poor  increased;    and  the  Miseries  and  Misfortunes  of  the  whole 

Kingdom  demand  the  Consideration  of  the  Freeholders.     London, 

1722. 
An  Excise  Elegy.     London,  1733. 
Remarks   upon   a    Pamphlet   entitled  Considerations  occasioned   by  the 

Craftsman  upon  Excises.     London,  1733. 
An  Humble  Address  to  the  People  of  England.     Being  a  Demonstration 

that  a  Land-Tax  is  more  prejudicial  to  Trade  and  Liberty  than  an 

Inland  duty  on  Wine  and  Tobacco.     London,  1733. 
An  Examination  of  the  late  Conduct  of  the  Ministry  with  respect  to  the 

Duties  on  Tobacco  and  Wine.     London,  1733. 
Seasonable  Reflections  occasioned  by  the  Bills  expected  in  Parliament 

relating  to  the  Duties  on  Wines  and   Tobacco.     London,   2d  ed. 

(1733)- 

Cautions  of  the  Maltsters,  Hop-Planters,  Brewers,  Distillers,  and  others 
trading  in  Excis'd  Goods  or  Merchandise  to  their  Brother  Electors 
of  Members  to  serve  in  the  next  Parliament  of  Great  Britain.  Lon- 
don, 1734. 

Occasional  Remarks  upon  the  Act  for  laying  a  Duty  upon  the  Retalers  of 
Spirituous  Liquors  and  for  Licensing  the  Retalers  thereof.  London, 
1736. 

The  Man's  mistaken  who  thinks  the  Taxes  so  Grievous  as  to  render  the 
Nation  unable  to  maintain  a  War.     By  an  old  Engleshman.     London, 

1755- 
The  Case  of  the  County  of  Devon  with  respect  to  the  Consequences  of  the 
new  Excise  Capital  Duty  in  Cider  and  Perry.     London,  1763. 


428  Supplementary  List 

Ways  and  Means  for  Raising  her  Extraordinary  Supplies  to  carry  on  the 
War  for  Seven  Years,  if  it  should  continue  as  long,  without  doing  any 
Prejudice  to  the  Manufacluries  or  Trade  of  Great  Britain.  [By  J. 
Massie.]     London,  1757. 

Occasional  Letters  upon  Taxation.  By  an  Independent  Man.  London, 
1780. 

Letters    on    Excessive    Taxation.     From    a    Philanthropist.     London, 

1785. 

The  Policy  of  the  Tax  upon  Retailers  considered;  or  a  Plan  in  favor  of 
the  Manufacturers.     London,  1786. 

Consequences  of  the  Act  for  the  Redemption  of  the  Land  Tax.  London, 
1798. 

Thoughts  on  Capital  Taxation  :  in  the  course  of  which  the  Policy  of  a 
Tax  on  IncoTties  is  impartially  investigated.     London,  1798. 

Redemption  and  Sale  of  the  Land  Tax  :  Thoughts  on  that  Interesting  Sub- 
ject and  Remarks  on  the  Original  Act  passed  for  that  purpose  in  June, 
1798;  and  on  the  Act  lately  passed,  to  explain  and  amend  same. 
London,  1799. 

C.  Official  Documents 

Some  probable  Efects  of  the  Exemption  of  Improvements  from  Taxation 
in  the  City  of  New  York.  A  Report  prepared  for  the  Committee 
on  Taxation  of  the  City  of  New  York.  By  Robert  Murray  Haig. 
New  York.     191 5. 

The  Exemption  of  Improvements  from  Taxation  in  Canada  and  the 
United  States.  A  Report  prepared  for  the  Committee  on  Taxation 
of  the  City  of  New  York.     By  Robert  Murray  Haig.     New  York. 

1915- 
Final  Report  of  the  Committee  on  Taxation  of  the  City  of  New  York.     19 16. 


INDEX 


Adams,  H.  C,  12. 
Adams,  T.  S.,  200,  335. 
Amhurst,  Lord,  64,  69. 
Asgill,  J.,  104. 
Ashley,  J.,  71,  72. 
Ashley,  W.  J.,  126. 
Auspitz  und  Lieben,  208,  230. 
Avebury,  Lord,  170,  171,  202. 

Bagehot,  E.,  272. 

Barone,  E.,  212. 

Bastable,  C.  F.,  12,  13,  25,  118,  171,  199, 

202,  269,  291,  310. 
Baudeau,  N.,  136,  175. 
Baxter,  R.  D.,  180. 
Bickerdike,  C.  F.,  286. 
Biersack,  H.  L.,  190. 
Blanc-Gilli,  M.,  94. 

Blunden,  G.  H.,  273,  277,  308,  312,  323. 
Bohm-Bawerk,  E.  v.,  209,  230. 
Boisguilbert,  121. 
Bolles,  A.  S.,  173. 
Brand,  J.,  83. 
Brentano,  L.,  47. 
Broglie,  Due  de,  165. 
Brooks,  J.,  45. 
Buchanan,  D.,  195. 
Burnaby,  A.,  35. 

Canard,  F.,  159-162,  184. 

Cannan,  E.,  13,  270,  277,  310,  314. 

Cantillon,  R.,  104. 

Carter,  J.,  loi. 

Carver,  T.  N.,  238. 

Cary,  J.,  41,  56. 

Chamberlayne,  E.,  79. 

Cherbuliez,  A.  E.,  162,  178. 

Child,  J.,  SS- 

Chorlton,  J.  D.,  279,  281,  319. 

Cleeve,  B.,  94. 

Clifife-Leslie,  T.  E.,  198,  315,  316,  332. 

Cohn,  G.,  194. 

Conigliani,  C.  A.,  210,  211. 

Cooley,  T.  M.,  169. 

Cooper,  S.,  76. 

Costelloe,  B.  F.  C,  284,  303. 


Courcelle-Seneuil,  J.  C,  162. 
Coumot,  A.,  181,  205,  230. 
Courtney,  L.,  170,  269,  300. 
Cradock,  F.,  25. 
Craig,  J.,  175,  179. 
Culpeper,  T.,  25,  96. 
Cunningham,  W.,  13,  85. 

Dangeul,  44,  59,  86. 

D'Anvers,  C,  64. 

Davenant,  C,  65,  97,  103,  104. 

Davenport,  H.  J.,  200. 

Decker,  M.,  84,  89,  91,  93,  94. 

De  Foe,  D.,  36,  98. 

De  la  Court,  P.,  50. 

Delatour,  A.,  199. 

Denis,  H.,  177. 

De  Witt,  J.,  so. 

Dickson,  A.,  153. 

Downes,  T.,  83. 

Drake,  J.,  99. 

Dupont  de  Nemours,  134-136. 

Dupuit,  A.  J.,  208. 

Edgeworth,  F.  Y.,  13,  212,  213,  214,  231, 
248,  279,  281,  285,  291,  292,  301,  303, 
306,  309,  310,  311,  312,  314,  317,  319, 
321,  322,  323. 

Einaudi,  L.,  218,  281,  285,  286,  287,  289, 
306,  314,  317. 

Falck,  G.  v.,  19. 
Farrar,  T.  H.,  315. 
Fauquier,  F.,  29,  91,  93. 
Fauveau,  G.,  206. 
Fawcett,  H.,  198,  319. 
Florez-Estrada,  A.,  257,  259. 
Forster,  N.,  60,  88. 
Fox,  A.  W.,  277,  284,  303. 
Franklin,  B.,  139,  140. 
Frend,  W.,  354. 
Friday,  D.,  362. 
Fulda,  F.  K.  v.,  190. 

Garnier,  J.,  177,  187. 
Gibbon,  A.,  166. 


429 


430 


Index 


Giffcn,  R.,  i8i,  269,  308. 

Conner,  E.  C.  K.,  84,  310. 

Goschen,  G.  J.,  273,  302. 

Graslin,  L.  F.,  141. 

Graziani,  A.,  199,  212,  221,  238,  291,  343. 

Gregg,  179. 

Griziotti,  B.,  200,  218. 

Gros,  G.,  268,  269,  270,  274. 

Gunton,  G.,  353. 

Haig,  R.  M.,  200,  324,  362. 

Hamilton,  Alexander,  140,  169-170. 

Hamilton,  Andrew,  154-159. 

Hamilton,  E.  W.,  170,  202,  281,  315,  321. 

Hayes,  H.  C,  200,  223. 

Heckel,  M.  v.,  275,  280. 

Held,  A.,  7,  201. 

Helferich,  J.  A.  R.,  182. 

Heron,  D.  C,  180. 

Higgs,  H.,  126. 

Hobbes,  T.,  24. 

Hobson,  J.  A.,  393. 

Hock,  C.  F.  v.,  3,  5,  7,  182,  192. 

Hoffmann,  J.  G.,  176. 

Horsley,  92. 

Houghton,  J.,  36,  48,  52. 

Hume,  D.,  116-117. 

Inama-Sternegg,  K.  P.  v.,  121. 

Jacob,  L.  H.  v.,  190. 
Jarach,  C,  362. 
Jenkin,  F.,  206. 
Jones,  R.,  195. 
Jowett,  B.,  214. 

Kaizl,  J.,  19. 
Kauffmann,  R.  v.,  280. 
Kopp,  H.,  186. 
Kroncke,  K.,  330. 

Lange,  M.  E.,  281. 

Laspeyres,  E.,  50. 

Lassalle,  F.,  203. 

Launhardt,  W.,  208. 

Leroy-Beaulieu,  P.,  140,  178,  189. 

Leser,  E.,  24. 

Le  Torsne,  G.  P.,  177. 

Levey,  E.  J.,  294. 

Le  Veillard,  140. 

Linden,  Cort  van  der,  166. 

Locke,  J.,  loi,  I02,  105,  106,  no,  114,  120. 

McCulIoch,  J.  R.,  149,  197. 
Malchus,  C.  A.  v.,  190. 
Manley,  T.,  47,  96. 
Mansfield,  Lord,  153. 


Marshall,  A.,  212,  230,  247,  263,  270,  273, 
279,  282,  286,  300,  310,  319,  321,  323. 

Martin,  R.  M.,  166. 

Massie,  J.,  60,  93,  94. 

Mildschuh,  W.,  366 

MiU,  J.,  196. 

Mill,  J.  S.,  180,  196,  261,  269,  282,  292, 
300,  309,  315,  328. 

Mirabeau,  Le  Marquis  de,  132,  141. 

Morellet,  140. 

Moulton,  F.,  284. 

Mun,  T.,  25,  29. 

Murhard,  K.,  176,  190. 

Murray,  G.,  202,  320. 

Myrbach,  293. 

Natoli,  F.,  3,  5,  II,  12,  13,  199. 

NichoUs,  J.,  44,  59,  84,  86. 

Nicholson,  J.  S.,  202,  263,  264,  265,  269, 

274. 
Noble,  J.,  180. 
Nugent,  R.,  58,  114. 

Overstone,  Lord,  51,  54. 

Pantaleoni,  M.,  3,  5,  7,  12,  177,  182,  207, 
208,  230,  238,  278,  283,  289,  290,  301, 
327.  330. 

Parieu,  E.  de,  178,  187-189. 

Parker,  E.,  80. 

Passy,  H.,  177. 

Petritsch,  L.  v.,  382. 

Petty,  W.,  29-33,  4Q,  112,  256. 

Philips,  F.,  39. 

Pierson,  N.  G.,  166,  183,  305,  307,  309. 

Pigou,  A.  C,  279. 

Plehn,  C.  C,  286,  377. 

Polhm,  N.,  78. 

Pope,  S.,  183. 

Post,  L.  F.,  294. 

Postlethwayt,  M.,  59,  60,  91,  115. 

Price,  L.,  310,  314,  3x5. 

Prince-Smith,  J.,  7,  193,  194. 

Prittwitz,  M.  v.,  163. 

Proudhon,  P.  J.,  172. 

Prynne,  W.,  39. 

Pulteney,  W.,  64. 

Purdy,  L.,  199,  284,  335. 

Puynode,  G.  du,  178,  189,  271. 

Quesnay,  126-132. 
Quid,  O.,  74. 

Rau,  K.  H.,  5,  7,  181,  191,  330. 

Rew,  275. 

Reynell,  C,  113. 

Ricardo,  D.,  147-151,  258,  259,  273,  292. 


Index 


43 


Ricca-Salerno,  24,  121. 

Richardson,  84. 

Riviere,  Mercier  de  la,  132-134. 

Roberts,  L.,  69. 

Roesier,  C.  T.  H.,  370. 

Rogers,  J.  E.  Thorold,  315. 

Roosendaele,  C.  de  Lauwereyns  de,  199. 

Roscher,  W.,  121,  194. 

Ross,  E.  A.,  253. 

Row-Fogo,  13,  270,  27s,  299,  314,  322- 

Saint-Peravy,  132. 

Sargant,  C.  H.,  269,  277,  284.  285,  318,  319- 

Sartorius,  G.  F.,  176. 

Say,  J.  B.,  176,  184. 

Schaffle,  A.  E.  F.,  182,  194. 

SchaU,  K.  F.  v.,  194. 

Scheftel,  Y.,  286. 

Schomberg,  A.  C,  61. 

Schulze-Gavernitz,  46. 

Scott,  J.,  183. 

Senior,  N.  W.,  196,  261. 

Shearman,  T.  J.,  204. 

Sheridan,  T.,  37. 

Sherman,  I.,  169. 

Sidgwick,  H.,  180,  182,  300. 

Sinclair,  J.,  24. 

Sismondi,  S.  de,  185. 

Smart,  W.,  284. 

Smith,  Adam,  141,  143-147,  3"- 

Soden,  J.  C,  190. 

Spahr,  C.  B.,  325. 

Stamp,  J.  C,  286,  393- 

Stein,  L.  v.,  165,  178. 

Stewart,  D.,  120. 

Stewart,  J.,  29,  11 8-1 19. 


Stiff,  M.,  66. 
Stourm,  R.,  190- 

Temple,  W.,  S3- 

Temple,  Sir  \V.,  49,  63. 

Tenerelli,  M.,  s,  372. 

Thiers,  A.,  163-164. 

Thiinen,  J.  H.  v.,  190,  262. 

Tivaroni,  J.,  199. 

Tracy,  A.  L.  C,  Destutt  de,  177.  i8i. 

Tucker,  J.,  51,  52,  61,  84,  85,  86. 

Turgot,  126,  137-139.  17s.  331- 

Vanderlint,  J.,  58-59.  62,  107. 

Vauban,  M.,  121. 

Verri,  P.,  152,  163. 

Vignes,  E.,  189. 

Vivant  de  Mezagnes,  M.,  108. 

Vocke,  W.,  194. 

Wagner,  A.,  7,  194. 
Wagstaffe,  W.,  99. 
Walker,  F.  A.,  153,  169. 
Walpole,  R.,  40,  64,  106,  no. 
Walras,  L.,  178,  208,  230. 
Waterhouse,  W.,  26. 
Watts,  J.,  67. 
Webb,  S.,  289-291,  315. 
Webster,  P.,  61,  87. 
Wells,  D.  A.,  84,  167-169. 
Weyermann,  P.,  286. 
Wicksell,  K.,  7,  209. 
Wolowski,  178. 
Wood,  W.,  105. 

Young,  A.,  so,  52,  56.  84,  94,  117,  120,  141- 
Young,  J.,  154,  15s,  175,  I79- 


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